By Meghan Hall
In 2019, the United States was still in the midst of its longest economic expansion in history, with growth that continued throughout all sectors, including industrial real estate. Industrial construction added 144 million square feet across more than 440 properties last year, with that growth expected to continue in 2020. According to a study released by CommercialCafe, construction completions could rise 29 percent in 2020—if current economic conditions prove to be short-lived.
“If the demand exists, development will continue. The versatility of these projects means that in many cases they can accommodate multiple companies,” explained Patrick McGregor, who authored the study. “If demand wanes, we can expect a slowdown in development.”
As of February 27th, when CommercialCafe extracted its data, industrial property completions were expected to hit 186 million square feet across 627 different properties. Healthy consumer demand and historically low interest rates, states the report, have driven the need for manufacturing and warehouse space.
However, in the current climate, logistics seems to be faring well. Amazon is planning to hire tens of thousands of new workers, while in the San Francisco Bay Area, the U.S. Postal Service announced it is planning to hire as many as 1,000 people to meet demand for delivered products. CommercialCafe has ranked San Francisco, the wider Bay Area and Seattle as several of the top 20 markets for industrial deliveries in 2020.
San Francisco has 2.5 million square feet of industrial slated for delivery in 2020, ranking 18th, while the larger Bay Area, specifically the South Bay, and Seattle are higher up on the list, coming in at eighth and ninth, respectively. The South Bay is expecting to see some six million square feet of space brought to market spread across 23 buildings. Seattle follows closely behind, with 5.756 million square feet of anticipated industrial completions.
The three markets follow behind California’s Inland Empire, who ranked number one, is expecting 26 million square feet—enough for 400 football fields—of completions this year, a 66 percent increase over 2019. Dallas, Texas was ranked number two, with nearly 23.5 million square feet of industrial completions across 75 properties expected for the coming year.
According to McGregor, all markets listed as part of CommercialCafe’s top 20 for industrial completions are significant hubs, with easy access to not just large populations, but major transportation centers.
“They’re all logistically significant, meaning they all have either a major port (Houston, New Jersey, Charleston) or a large international airport (Dallas, Chicago, Denver) or both (Los Angeles, San Francisco, Seattle),” said McGregor. “Additionally, they’re all expansive markets, meaning they have developable land to expand into.”
However, each market has its merits, making it attractive to developers of all shapes and sizes.
“No two markets are alike,” continued McGregor. “While Los Angeles has LAX and a large port in Long Beach, Inland Empire offers a sort of staging area, if you will, with more developable land that’s ideally located for cross-country transport of goods, both over-the-road and by rail. Markets like Denver, Phoenix and Columbus offer centralized hubs for distribution to smaller markets in their vicinity.”
The explosion of industrial development in these markets has also meant that industrial product itself is changing. The rise of e-commerce, warehousing and shipping, as well as the gig economy, have contributed to the evolution of industrial product over time as developers try to appeal to a new industrial tenant base.
“The U.S. has been shifting away from manufacturing slowly for more than a decade,” said McGregor. “Therefore, the specialization of industrial facilities has diminished, leading to the increasing homogenization of industrial real estate assets—versatile and adaptable—also driven by the rising capacity requirements for distribution companies, like Amazon. The versatility of these new buildings offers a “plug-n-play” environment for prospective tenants.”
However, McGregor and CommercialCafe notes that these numbers could change; in many places such as the Bay Area and Seattle, non-essential construction has come to a halt, with only necessary housing or public works projects moving forward. McGregor and CommercialCafe emphasized that how current market conditions caused by COVID-19 will impact construction timelines have yet to be truly realized.
“The economic slowdown due to the pandemic will likely affect completions,” stated McGregor. However, it’s impossible to know exactly how this will play out. Accordingly, we provide only a state of the industry and make no predictions about the future.”