'Safety Stock' Driving Warehouse Leasing To More Record Highs

Metro Atlanta industrial landlords are sailing toward another year of record absorption as companies increase their leasing activity.

The wind in the sails, this time, is more than just tenants building out their e-commerce delivery networks. Companies also are taking on extra storage space after the coronavirus pandemic exposed a weakness in the just-in-time delivery model that kept inventories razor thin.

“Just-in-time is a great concept, but when you have shocks to the system like we have, you also realize that lean inventories can cost you sales,” said Lisa Ward, the managing director of Atlanta-based industrial developer Core5 Industrial Partners.

Tenants leased 5.6M SF more than they emptied between April and June of this year in Metro Atlanta, according to data provided by Transwestern. All told, tenants have absorbed 16.4M SF in the first half of the year, already approaching the high watermark set in 2017 when absorption hit a peak of 21.5M SF. Net absorption for all of 2020 was 16.9M SF, according to Transwestern, with leasing activity gaining momentum over the start of the year.

“We are on pace to beat our historical demand peak,” Transwestern Vice President of Research Keith Pierce said. “Even if they have like normal pace, it's had to imagine us not hitting a new record.”

Kellogg's executed the largest lease so far this year, taking 1.2M SF at Prologis' Orchard Hills industrial park in Newnan, followed by discount grocery chain Lidl, which leased 925K SF in a $100M regional distribution center in Covington.

Pierce said a lot of the activity is a result of ripple effects from the boost in online shopping last year. Online sales jumped nearly 40% across the globe during the first quarter of this year, according to U.S. Commerce Department numbers cited by DigitalCommerce360, a larger year-over-year increase than 2020, when e-commerce sales rose 32.4% to nearly $600B.

“In terms of the large leases done, we're seeing a lot of e-commerce, but we're also seeing a lot of fulfillment from groceries, Lowe's and Home Depot and [from] home improvement. It's not all going to be Amazon and Wayfair,” Pierce said. “It's these other companies essentially filling their distribution networks.”

Atlanta is not the only market seeing a surge in industrial leasing demand. Nationally, absorption was nearly 100M SF in the first quarter, the third-highest quarter on record, according to CBRE. The firm did not have second-quarter numbers as of press time. 

Grocers and third-party logistical companies have trumped e-commerce in leasing space so far this year. For the first six months of 2021, those two groups accounted for more than half of all leasing in the U.S., gobbling up more than 137.6M SF, according to data compiled by CBRE. E-commerce companies leased 36.2M SF alone in the first half of the year, followed by food and beverage companies, which inked 21.7M SF in leases, according to CBRE.

Developers nationally are developing more than 375M SF of new distribution and warehouse space, according to CBRE, with nearly half of that space already pre-leased.

“I've been in this industry 30-plus years. It's the first time I feel like I'm working with the cool kids,” said Pete Quinn, the national director for industrial services at Colliers. “Virtually every market we're in … we're seeing record amounts of building, record amounts of absorption. It's pretty universal.”

While a lot of the warehousing demand continues to come from companies expanding their e-commerce delivery networks, experts say the product shortages experienced during the pandemic and into this year are compelling companies to lease more industrial space as their reliance on a just-in-time inventory — a system by which companies keep less stock on hand in favor of space efficiency — gets severely tested.

“The transportation market has been so disrupted, people are trying to move from a just-in-time model to a just-in-case [model], where they have increased inventory,” Baker Logistics Services Inc. principal Lauren Pittelli said. “All sectors are facing this impact where there have been large delays in getting cargo on vessels and planes and big cost increases to do so.”

The industrial industry has a term for companies that lease space to store goods they may not need in the near term: safety stock. Third-party logistics operator Integrated Distribution system has had more clients asking for safety stock this year, CEO Mark DeFabis said.

“Just-in-time is good as long as your supply chain and each point in that moves efficiently. Once there's a constraint or a delay in any part of your supply chain, just-in-time falls apart,” DeFabis said. “What we're seeing is our customers carrying additional inventory because they don't want to deal with those delays, especially as we get into peak season.”

This trend is keeping industrial landlords both in Atlanta and across the nation bullish about leasing activity through 2021.

“A lot of retailers learned their lesson and now they want to keep what is known as safety stock in their warehouses. That is becoming a demand driver for industrial,” CBRE Senior Director James Breeze said. “This is a longtime demand driver. I don't think we're going to hit a peak for at least a few years.”