Supply Chain, Inflation Issues Creating Even More Demand For Industrial Space

Supply chain backlogs and rising costs of materials and labor have created challenges for the companies that occupy industrial real estate, but these issues may actually benefit their landlords. 

Industrial tenants are increasing their demand for space to stockpile goods to mitigate the supply chain issues, and adding more facilities can also help decrease their overall logistics costs by cutting down on transportation expenses, top industrial executives said Tuesday at the National Association of Real Estate Editors Conference in Miami.

These dynamics could create even more tailwinds for an industrial market that has already been one of the hottest real estate sectors over the last year as e-commerce providers have ramped up their delivery networks during the coronavirus pandemic. The U.S. industrial market experienced 291.9M SF of net absorption through the first nine months of this year, according to CBRE, 135% more than the same period last year. 

Duke Realty Corp. Regional Senior Vice President Stephanie Rodriguez, who leads the Florida region for the industrial REIT with a 160M SF U.S. portfolio, said tenants doing deals today are requiring more space to stockpile goods.

"Our tenants are looking for more space because they don’t want just-in-time inventory, they need to stockpile inventory because they’re finding that containers aren’t being offloaded in ports right now, they’re just lingering outside of ports, and then when they get to ports they don’t have truck drivers to bring them to warehouses," Rodriguez said. 

"There are a lot of different factors impacting our customers, and we’re seeing a real uptick impact in demand for current customers looking for space in the market right now," she added. 

Rodriguez said in Florida, where the REIT owns more than 13M SF of industrial space, tenants are typically requiring around 15% to 20% more space to stockpile goods.

"A tenant who may want to renew their lease, they might be coming to us and saying 'we want to renew, but we really need 30K SF more space,'" she said. 

CBRE Executive Managing Director John Morris, who leads the firm's Americas Industrial & Logistics business, said this growth from industrial tenants needing to stockpile goods has helped drive CBRE's leasing activity up 64% this year. 

Additionally, Morris said the inflationary pressures in the industry, including rising labor and transportation costs, are pushing industrial tenants to lease more space in order to save money. 

Warehouse rent only comprises around 5% of the total logistics costs for industrial occupiers, Morris said, while transportation costs account for between 50% and 70%. And while he said industrial rents are rising about 10%, the transportation costs are going up much faster. He said freight costs are increasing by around 50% and container prices are up by as much as 150%, making them the more pressing expenses that companies need to address. 

In order to bring down these transportation costs, many industrial tenants are looking to increase their real estate footprint to be closer to customers and reduce the distances that trucks need to drive, he said. 

"The factors that are going up more significantly are the ones those tenants have to fix, and the way you fix them is by adding facilities and space to your network," Morris said. "It sounds crazy to say this, but inflation in the supply chain is actually not a bad thing for industrial real estate."

Morris, speaking to Bisnow after the NAREE panel, said he expects transportation costs to continue rising next year, especially because the shortage of truck drivers will push wages up, and this will further increase the demand for industrial real estate. 

"If you're a tenant trying to lower your average cost to ship to your house, to a warehouse, to a store or whatever, you need more space when your transportation costs rise," Morris said. "As you add space, transportation costs go down, but facility costs go up. So that will fundamentally continue."

Rodriguez told Bisnow she thinks industrial users will continue the practice of stockpiling goods even after the supply chain issues are eventually resolved, meaning that they won't pull back from the excess space they have leased this year. 

"The pandemic really gave people the opportunity to look hard at how they’re operating their businesses. [They're saying] 'do we shift our model and keep a little more inventory on-site?'" she said. "Real estate is such a small piece of the pie for these operators. It's not that big a deal to increase your footprint incrementally to accommodate for that safety stock as opposed to the just-in-time inventory."