As Orange County continues to see significant industrial real estate development and investment from the likes of Amazon, Medline and others, two major commercial real estate brokerage firms believe that the industrial real estate market and the logistics sector will continue to attract significant capital in 2021.
JLL and Cushman & Wakefield each issued research reports and forecasts that portend to another banner year for the logistics sector in 2021 despite, and in some cases, due to the continuing impacts of COVID-19.
JLL recently reported that industrial commercial real estate sales volume in the United States in 2020 totaled nearly $96 billion—the second-best year on record. The Chicago-based firm added that the outlook for the industrial sector in 2021 already looks bright. With increased competition among investors for industrial product, JLL Capital Markets has found one sub-class that is gaining big interest—multi-use logistics, which are typically older multi-tenant assets with solid footprints within infill urban logistics markets that boast compelling rent growth profiles.
“The long-term outlook for multi-use logistics is strong, with clear industry momentum from ‘fabric of society’ tenants and growing investor demand for this sub-class,” said Senior Managing Director John Huguenard, co-head of JLL’s Industrial Capital Markets group. “With new yield-focused investors entering into the industrial space, small bay product is desirable as an alternative to the ever-tightening bulk industrial market.”
In a new report, JLL Research defines multi-use logistics assets as 20,000-square-foot to 100,000-square-foot multi-tenant industrial buildings in dense, infill locations around the U.S. These buildings often contain distribution, flex showroom, industrial showroom, R&D, warehouse and/or manufacturing space and have a diversified, local tenant base.
Given they are often older properties, these assets witnessed population centers growing around them, making multi-use logistics properties not only almost impossible to replace but highly sought-after as last-mile logistics locations close to end users, JLL stated in its recently released report. Compounded by industry fundamentals driven by macroeconomic factors such reshoring and acceleration of e-commerce adoption, the increased demand for these smaller, multi-tenant industrial assets has significantly dropped vacancy rates nationwide, now holding at under 9%.
“This sub-class has huge potential upside on rent growth driven by low vacancy and limited new supply,” JLL’s Huguenard said. “Multi-use logistics rent has grown more than 54% since 2010 and nearly 21% since 2017, outpacing the national average for the broader industrial market.”
JLL anticipates a nationwide 4.6% rent growth for triple-net-leased multi-use logistics between 2021 and 2024, compared to 3.8% for all U.S. multi-tenant industrial and 3.7% for the entire property sector. Yet, this sub-class accounts for only 15% of overall industrial product inventory. For trades in 2020 of more than $5 million, these properties accounted for 1,973 transactions at $128-per-square-foot with an average cap rate of 6.62% (down from the five-year average of 6.72%), demonstrating their value.
Adding to the advantages are a limited supply and lack of new construction, JLL added. Construction activity for multi-use logistics properties is hovering between 0.1% and 0.3% of existing inventory this cycle, which is significantly below the national average of 1.6%. With little new product entering the market and increasing pressure from rising land-values to redevelop for other uses, tenants have very limited options outside their current space—helping constrain vacancy nationwide, the JLL report theorized.
Commercial brokerage firm Cushman & Wakefield also recently released a glowing forecast for 2021 for the U.S. industrial real estate market.
The forecast for North American industrial absorption from 2021 to 2022 is a healthy 481.3 million square feet. New supply—which has surpassed demand two years in a row—will maintain this trend over the next two years. New deliveries are projected to reach 697.3 million square feet of product from 2021 to 2022.
Nonetheless, Cushman & Wakefield believes North American vacancy will remain low, ending 2022 at 6.2%—an increase of only 130 basis points over year-end 2020. Despite the forecasted uptick, North American vacancy will remain nearly on par with its 10-year average (2012-2021) of 6%.
Average net asking rents for classes of industrial product will rise to a new nominal high of $6.97-per-square-foot at year-end 2022.
Among the key takeaways from the report include that pent up demand is forming and therefore investors should expect an economic surge in the back half of 2021. In addition, Cushman & Wakefield believes that fundamentals will continue to generate solid rent growth throughout the next few years and that global trade is expected to rise as economic growth accelerates and trade tensions ease, thus boosting demand for industrial product.
