By Mike Paleo
The industrial real estate market has been on a fast-moving rollercoaster ride through the pandemic, and it’s not slowing down just yet. While the general public is pausing cautiously for a recession-like dip, industrial developers are feverously battling for the front seat of the ride. Most leaders and business owners who lease space in manufacturing and distribution have heard “your rent is going up”–but behind the scenes, the institutional real estate owners have given cause for concern. If you’re looking to engage in the industrial real estate market soon, here are a few trends impacting this high-flying industrial market that seems to only be blindly speeding up.
Supply Chain Disruption
We’ve been talking about supply chain disruptions and the impacts on goods and materials since March of 2020. As the pandemic quickly spread, it changed how items moved throughout the global economy. Goods shipped overseas caused months-long delivery delays, drastically increasing freight costs. Every industrial product type from last-mile distribution centers, raw land for containers and trucks, and cold storage space continued to be in high demand causing rental rates to soar.
Land in Short Supply
One of the primary reasons behind the increasing cost of developable land is a shortage of land. In Southern California for example, land scarcity is particularly noticeable in areas where warehouse space is desperately needed, as most of the area has already been developed. This results in companies competing over the limited supply available, driving up costs and even pushing out smaller players. In areas like Orange County, the Inland Empire and Los Angeles, which are close to both ports and residential areas, it can be particularly challenging to find a good spot to develop. In response to this shortage of land, we have seen some of the larger institutional developers turn to building multi-story industrial buildings, increasing the value of the land by increasing the total property square footage–they are building “up, not out.”
Development Costs Increasing
Raw land is not the only facet of the industrial real estate market experiencing a jump in pricing. We have also seen the cost of raw materials and construction labor increase as well. Costs for concrete and steel have doubled and even tripled over the past couple years, and construction delays due to supply chain issues are causing havoc on initial estimates.
Onshoring from Asia Impacting U.S. Border Markets and Mexico
Supply chain disruptions have caused manufacturers to rethink their production strategy. Major manufacturers have set up production closer to home so that goods are created near the buyer. This helps manufacturers avoid bottlenecks at the ports and any other supply chain issues that may be caused by COVID outbreaks in other countries. Mexico has been a major winner in the effort to make supply chains more resilient. In 2020, Mexico saw a 514 percent increase in bids from U.S. companies looking to bring production closer to home, and that trend is continuing. Developers are finding wide open development opportunities in rural border towns from Calexico, California to El Paso, Texas.
Up to the Challenge
While the industrial real estate market has its challenges, it is possible to enter or change your position in the market. We can’t stress enough how critical it is to utilize a tenant representation expert that specializes in the industrial sector to ensure companies reach the best outcome for their requirements and teams. The experienced team at Hughes Marino is not only staying on top of market trends, but is also thinking outside-of-the-box to help our clients meet their current needs. With confidential, no conflict driven guidance and specialized tactics, we are proud to be able to help our clients navigate their complex buyer and tenant needs effortlessly.
Mike Paleo is a senior vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Mike at 1-844-662-6635 or email@example.com to learn more.