Data released today by Chicago-based commercial real estate firm JLL shows very strong fundamentals for the US commercial real estate market for the first quarter.
In its US Industrial Outlook: Q1 2022, JLL observed several insights that reflect how competitive market conditions continue to give landlords a market advantage, as JLL Senior Director Mehtab Randhawa noted, while also putting upward pressure on asking rents.
Key findings JLL cited in the report included:
-the national vacancy rate falls from 3.8% to 3.4% for the sixth straight quarter despite an influx of new deliveries;
– Average asking rent increased to $7.62 per square foot (psf), up 7% compared to the fourth quarter, the largest quarter-on-quarter increase since at least 2000;
— Year-to-Date Net Absorption — marked the third highest quarter for net absorption on record at 110,758,069 and the highest of any first quarter, following the fourth quarter of 141.8 million sft;
year-to-date construction shipments were 89,992,432, with properties under construction at 530,474,986, with a quarter of the latter number being in the “megabox” size category of 1 million sf or larger;
– Developers shipped 90 million sf of new inventory in Q1, consistent with Q4 2022;
– Port markets maintained a price premium over non-port markets as rental growth reached 23% year-on-year; and
– Total transaction volume for the first quarter was $33.2 billion, the second-highest ever for the first quarter
“The occupier’s sticker shock is not limited to demands for rent, however,” Randhawa wrote in the report. “Those seeking new leases in the lowest vacancy markets face steeper annual rent increases and minimal concessions. Businesses with a business need to locate in these white-hot markets are willing to pay the price, while occupiers with greater location flexibility are exploring their options in markets with cheaper rents, lower labor costs, and more plentiful new products. This trend is driving a shift in demand to markets in the Southeast and South Central regions.”
Tenant Shares: JLL observed that 3PLs accelerated occupancy activity in the first quarter (as a percentage of total square feet rented) at 14%, followed by logistics and distribution at 12%. Rounding out the top six were: building materials and supplies at 12%; Food and drinks at 10%; Retailers (traditional), at 8%; and e-commerce at 8%. And it added that total lease volume has grown 17% annually.
In terms of so-called key growth industries, JLL pointed to 3PLs leading for annual growth in square feet rented at 60% CAGR, followed by building materials and equipment at 32%; and food & drink with 23%. And looking at traditional retailers, JLL said that at the start of the pandemic, JLL Research found that leasing activity in the industry was up 38.4% over the past three years, although they saw a lull in leasing. It said strong demand from hardware retailers like Home Depot and Lowe’s was a key factor in the sector, leading e-commerce in the first quarter.
The JLL Industrial Research Team said 3PLs signed leases for nearly 60% more space than in the first quarter of 2021, bolstered by continued outsourcing of supply chain operations by e-commerce retailers and others.
Region by region: Looking at square feet under construction as a percentage of current inventory by region, JLL said South Central leads at 6.4%, followed by Mid Atlantic at 4.9%, Northeast at 3.8%, Southeast at 3.7%, West at 3.6%, and Midwest & Great Lakes at 2.8%, with the average US total at 3.8%.
When asked what drove the 7% quarter-over-quarter increase at an average asking rent of $7.62 per PSF, the JLL Industrial Research Team explained that vacancy rates continued to decline in the first quarter and pent-up demand due to the Pandemic have increased the leasing volume.
“The strong fundamentals and competitive environment seen during the quarter put upward pressure on asking rents,” they said. “Furthermore, average asking rents for new properties coming onto the market have pushed overall asking rents to new highs.”
Because JLL’s Randhawa found that tenants with greater location flexibility are exploring their options in markets with cheaper rents, lower labor costs and more plentiful new products, the team said this is a by-product of tenants having flexibility and migrating to lower-wage markets with labor availability.
“For example, we’re seeing tenants moving from the New York and New Jersey markets to the Southeast,” the team said. “On the other hand, tenants with companies closely tied to the ports stay because it makes financial sense and due to increasing cartage. We’ve seen this with Los Angeles and Long Beach renters moving to Phoenix, Reno, Central Valley South.”
The JLL Industrial Research Team said the high occupancy volumes observed in 2021 continue to drive net absorption in 2022 as tenants physically occupied their space. They added that overall absorption in the first quarter was historically lower than other quarters due to cold weather conditions playing a role in move-in delays.
What’s Next?: Looking ahead, JLL provided an optimistic outlook for the future of the industrial real estate market.
“Despite an expected price decline for larger deals (US$150m+), given the dominance of funding, deal volume is expected to remain robust throughout the year,” said the JLL Industrial Research Team. “As higher interest rates push pricing down, cash-centric buyers are likely to be active and competitive in transactions, sustaining transaction velocity through the remainder of 2022.”
About the author
Jeff Berman, Group News Editor Jeff Berman is Group News Editor for logistics management, Modern conveyor technologyand Supply chain management review. Jeff works and lives in Cape Elizabeth, Maine, covering all aspects of supply chain, logistics, freight transportation and materials handling on a day-to-day basis. Contact Jeff Berman