Developers across the country are racing to build new warehouses, as vacancy rates approach sub-1 percent in some markets.
The only problem? Many can’t actually finish them in a timely manner, due to supply chain issues and labor shortages.
Deliveries of speculative construction industrial warehouses larger than 100,000 square feet dropped significantly in 2021, according to a recent report from Newmark.
Around 80 million square feet was delivered across 23 major markets in 2021 — down from about 110 million square feet in 2020.
The warehouses that are being delivered are getting snatched up quickly. The average length of time between one of these warehouses finishing and being fully leased was less than three months in 2021, according to the report.
The trend is especially evident In Los Angeles, where spec warehouses greater than 100,000 square feet in size are leased on average around a month within a few weeks of being delivered to the market. The trend holds in Southern California’s Inland Empire – a region made up of San Bernardino and Riverside counties to the east of Los Angeles, and currently the tightest industrial market in the country with a vacancy of 0.8 percent in the fourth quarter. Large warehouses tend to lease within a month of availability in the Inland Empire.
The fast lease-up times point to a pivot towards pre-leasing — many spec developments are leased before they are completed, Newmark added, though developers have become hesitant to sign pre-lease deals too far in advance.
“The velocity of rent growth is such that a moment after a lease signs, the contract rate is already under-market,” Newmark’s Lisa DeNight and Eric Messer wrote in the report.
Around 500 million square feet of industrial warehouse was under construction across the U.S. in the fourth quarter. Spec warehouses make up more than three quarters of this pipeline, according to Newmark.
From 2015 to 2021, the Inland Empire saw the most deliveries of spec warehouses totaling 115 million square feet. Chicago saw 105 million square feet of deliveries, while Atlanta saw 94.5 million square feet.
Amazon has been a key factor in both leases and acquisitions of industrial space. The company recently disclosed it had doubled the amount of such property it owns, to 16.6 million square feet, last year.