Q2 industrial real estate activity points to tight market conditions, reports JLL

The industrial real estate market had another strong batch of data for the second quarter, according to data issued this week by Los Angeles-based industrial real estate firm JLL.

In its 2021 U.S. Industrial Q2 Outlook, JLL highlighted various highlights, including:

• quarterly vacancy coming in at one of its lowest quarterly averages, at 4.8%;
• quarterly rents among the highest on record, at $6.62 per square feet, and annual rents increasing at a 5.1% rate, with JLL expecting industrial rents to continue to grow between 4%-to-7%;
• and logistics and distribution represented the top leading industry for the quarter, representing 60.7 million square-feet of leases, for the second quarter, and 24.9% of total leasing volume for the first half of 2021

In the report, Mehtab Randhawa, JLL Director of U.S. Industrial Research, wrote that the combination of leasing and construction activity in the quarter helped drive industrial real estate momentum, with market availability extremely tight, due to all-time low vacancies and new market-high rents. What’s more, she added that as steel shortages and fluctuating prices continue, there has been a minimal impact on the construction pipeline, which saw 69 million square-feet delivered in the second quarter.

“With increased competition in the industrial market, buildings are not staying vacant for long and vacancies continue to drop as available supply declines,” said Randhawa. “As a result, tenants may find that they have to sacrifice certain needs, whether it be building features or location, when looking for space. The industrial leasing environment in Q2 2021 appeared to be favoring landlords, giving them the ability to work with tenants on lease terms and contracts. Average lease terms have remained consistent for tenants (68 months), part of it is due to the substantial rent increases markets have seen over the past decade and the location compromise that some tenants have to make in the short term due to limited available options in the market.”

The impact of supply chain and logistics operations was prevalent in the report, with JLL observing that as port dwell times have gone down, rail trail times have started to go up, with the lack of container storage space being a bottleneck. And the firm added that now, more than ever, urban logistics is at the forefront, and demand for third-party logistics companies to manage the distribution, warehouse and fulfillment of goods has become essential to keep up with consumer shopping habits.

“Rapid changes in consumer shopping habits continue to add pressure to the global supply chain, and drastically keep increasing the volume of imported goods to the United States,” said Randhawa and Kelsey Rogers, Senior Research Analyst, Industrial, Americas at JLL. “As a result, demand for container storage space continues to grow. Additionally, current zoning barriers and restricted capacity have the potential to impact future demand for container storage space. For occupiers, it is essential for them to evaluate their current supply chains. It is important even more now to see where occupiers source and distribute their goods. Investments in supply chains have been increasing consistently over the last decade. These disruptions (shipping logjams, weather disruptions, etc.) add pressure to shift the global supply chain and calls for occupiers to hold inventory closer to prevent future disruptions.”

With net absorption outpacing deliveries—as more than 69 million square-feet was delivered—and 408.6 million square-feet currently under construction, JLL said that the pipeline does not show any sign of slowing down, which could lead to a potential supply shortage related to the ongoing surge in demand for industrial product. For the second quarter, net absorption was near a record high, at 107 million square-feet, and year-to-date is nearly at 200 million square-feet and pegged to top 2020 levels.

“In the short-term, the industrial pipeline has 408.6 million square-feet currently under construction, this will help meet much of the demand we are seeing,” said Randhawa and Rogers. “Long-term effects of net absorption outpacing deliveries include limited supply for tenants, as well as constrained land availability. As a result, this could increase competition on the leasing side and warrant an under supplied industrial market.”