The commercial real estate industry faced major impacts as a result of the COVID-19 pandemic. However, while many faced negative ramifications, the logistics sector fared considerably well as a result of the new consumer habits brought on by the pandemic. In a report analyzing the global logistics market, Cushman & Wakefield reported positive growth in the sector, with many Western U.S. markets leading the way.
“The U.S. and global logistics sector showed resilience during the strict lockdowns and benefitted from consumer and business reactions. Broadening e-commerce, both geographically and by product range, were and will be a key driver of new spaced demand of the next decade,” Jason Tolliver, executive managing director and Americas logistics and industrial investor lead for Cushman & Wakefield, said.
Despite the economic downfall caused by the pandemic, the logistic sector continued to see growth throughout 2020. According to the report, global demand in the sector remained high with increasingly low vacancy rates. In North America alone, 539.9 million square feet of industrial space was absorbed. From 2021 to 2022, new deliveries in the sector are anticipated to reach 757.3 million square feet from 2021 to 2022. At the same time, North American vacancies are anticipated to remain low with a projected 5.8 percent vacancy rate by the end of 2022.
According to the report, high demand and low vacancy has caused an increase in rental rates across much of the sector. Globally, average net asking rents for all classes of industrial product is expected to rise to $7.80 per square foot by the end of 2022. On a global scale, many U.S. markets ranked highest in terms of rental growth. San Francisco ranked third in the world, with an average asking rent of $18.25 in the fourth quarter of 2020. Other U.S. markets, including the Puget Sound, San Diego and Orange County also ranked high with average asking rental rates of $14.31, $13.44, $12.73, respectively.
“The Western United States has some of the tightest markets (i.e., lowest vacancy rates) in North America with Orange County, Los Angeles, the Inland Empire, Puget Sound, Portland, San Jose and Sacramento all having vacancy rates anchored below 5 percent,” Tolliver said. “The Western U.S. has been a super-charged engine for leasing demand with Phoenix, the Inland Empire, Boise, Los Angeles and Las Vegas and Salt Lake City performing remarkably well.”
Tolliver said this growth is in large part due to consumer trends, such as online shopping, causing an increased demand for space in the sector. The pandemic, as well as a general rise in the use of technology over the past several years, has caused major growth in e-commerce. As the sector grows, more retailers are focusing efforts on distribution and manufacturing facilities as opposed to traditional storefronts. According to the report, this growth has been seen largely throughout Asia, with the region accounting for more than 75 percent of the world’s retail sales growth.
As a response to this growth, Cushman & Wakefield suggests retailers in the U.S. are reassessing business models and following suit with trends seen in Asian markets. According to the report, e-commerce related real estate leasing activity has been concentrated at the consumption-end of the supply chain, which will help manage increasing amounts of product returns as well as allow for fast and efficient delivery of goods.
“Lockdowns, fear of infection and other restrictions encouraged more consumers to shop online, even for products like groceries that had previously seen lower online adoption rates. Several years of digital sales growth were condensed into 2020 alone and many consumers tried online shopping for the first time. Logistics was/is also boosted by shifts on the production side. The trend of nearshoring is expected to accelerate demand for production and logistics space closer to consumers, while concerns about future supply chain disruptions are already leading to higher levels of inventory being carried.” Tolliver said.
As demand rises in the sector, companies look to address a shortage of labor in the sector. According to the report, 69 percent of manufacturers in the U.S. are interested in bringing production back to the U.S., with 55 percent saying that they will invest in facilities and equipment to make this happen. In turn, Cushman & Wakefield suggests this will continue to drive demand for real estate in the sector.
“In the immediate- to near-term we will see more consumer products and component inventories for manufacturing being held by retailers and manufacturers alike to safeguard stock levels from supply chain disruptions, ensuring their ability to deliver to end users,” Tolliver said. “In the medium-term we are likely to see the diversification of sourcing including an emphasis on localizing or “nearshoring” to be closer to plants while holding more inventories. In the long-term, we will see some sectors locating plants and component sources closer to each other as well as supply chain and production line restructuring that will make just-in-time inventory management possible again.”