CSCMP's Supply Chain Quarterly
July 23, 2019
Forward Thinking

Warehouse demand stays sky-high, real estate firm says

Trend driven by e-commerce logistics, distribution, and warehousing, says Avison Young.

Demand remains red hot for large warehouses near major cities, as e-commerce and last-mile logistics providers seek sites close to their customers in order to provide efficient delivery, an industry report finds.

Online retail giants and their third-party logistics (3PL) partners are driving the trend, which is triggering rising land and development costs in many key markets, according to the "Spring 2019 Global Industrial Market Report" from Avison Young, a Toronto-based commercial real estate services firm.

The facilities in highest demand are customized design-build facilities that are fully automated and reliant on new technologies, as renters seek further supply-chain efficiencies, the firm said.The report echoes a recent finding by commercial real estate giant CBRE Group Inc. that e-commerce and logistics companies are claiming a growing share of U.S. warehouse leases as they search for the optimal sites for locating their DCs.

"E-commerce logistics, distribution, and warehousing requirements continue to drive the market and are increasing in line with online retail sales," Mark E. Rose, chair and CEO of Avison Young, said in a release. "This strong demand has driven down supply, with developers increasingly becoming more innovative in regard to maximizing value through the repurposing of obsolete assets such as vacant big-box retail stores and aged office buildings, as well as exploring multi-storey facilities in a growing trend that caters to demand for close-in warehousing and distribution."

While the U.S. tends to receive most of the headlines for e-commerce growth, this market sector is heating up across the globe. The report covers 64 industrial markets in seven countries across the globe: Canada, the U.S., Mexico, Poland, Romania, the U.K., and South Korea. For all those markets, the strong demand and tight supply continue to put upward pressure on rental rates, while single-digit vacancy rates stayed low.

In response, investors are building new warehouse properties to meet the demand. The analysis revealed that the development pipeline remains robust, in terms of both product deliveries and new space under construction. Those investors are attracted not only to the newest distribution and warehouse facilities, but also to the opportunity to find additional value in older assets near urban areas, according to Avison Young.

"Investor interest in the industrial sector continues to grow unabated and the forecast for the remainder of 2019 is that industry dynamics will continue to be positive, attracting investors and resulting in low yields and rising asset values," Rose said.

Drilling down to North American regions, the report found that the average U.S. industrial vacancy rate was unchanged at 5 percent compared with one year earlier and the largest U.S. markets remained extremely healthy and landlord-favourable.

According to the report, last-mile logistics are fuelling an increasing number of adaptive reuse projects and the U.S. industrial market continues to record exponential supply growth as it adapts to the modern requirements of occupiers. In land-constrained metros, the redevelopment of obsolete assets like vacant big-box retail stores and aged office buildings is a growing trend that caters to demand for close-in storage, warehousing and distribution.

Likewise, Canada's industrial vacancy rate remains at a historic low, ending first-quarter 2019 at 3 percent—down 70 basis points from the same quarter in 2018. Canadian demand is outpacing new development and will continue to do so, even though almost twice as much space is under construction compared with spring 2018, the report found.

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