Market Intel – Decelerating Bulk Industrial Demand: Analyzing Figures and Key Markets

SKIP AHEAD TO:

• SHARE OF TRANSACTIONS GOING TO DEALS OF 100,000 SQUARE FEET OR LARGER DECLINED YEAR OVER YEAR IN EACH MARKET EXCEPT PA/SOUTH NJ/DE
• BULK INDUSTRIAL DEMAND SLOWING AMID IMPROVEMENTS IN SUPPLY CHAIN AND STABILIZING CONSUMER DEMAND 
• WHICH LANDLORDS AND TENANTS TOPPED THE CHARTS FOR BULK TRANSACTIONS IN COMPSTAK DATA SINCE 2020?
• DOMINANT BUILDING CHARACTERISTICS IN BULK TRANSACTIONS: NEW CONSTRUCTION AND HIGHER CEILING HEIGHTS
• SINCE 2020, THE PREMIUM FOR THE AVERAGE STARTING RENT PER SQUARE FOOT IN SMALLER TRANSACTIONS RELATIVE TO BULK TRANSACTIONS HAS DECLINED
• DWINDLING CONSTRUCTION PIPELINE COULD MEAN LACK OF BULK INDUSTRIAL OPTIONS GOING FORWARD

BULK INDUSTRIAL DEMAND MODERATES IN 2023

As 2023 draws to a close, market participants are reporting that bulk industrial demand, characterized as large transactions over 100,000 square feet, is slowing for the first time in the last several years. With the rise in e-commerce and last-mile delivery demand in recent years, the market has seen a growing incentive to construct progressively larger industrial buildings. This trend emerged as users actively sought out larger footprints to accommodate their needs. According to a Colliers’ third quarter report, the vacancy rate for big-box facilities larger than 750,000 square feet has more than doubled year over year, expanding from 2.4% at mid-year 2022 to 5.4% in 2023, and the Inland Empire, one of the country’s most robust industrial markets, reported negative absorption (-3.9 million square feet)  for the first time in 13 years.  

Over the last few years, the following markets have been key centers of bulk industrial activity in CompStak’s data:

• Chicago Metro
• Los Angeles – Orange County – Inland Empire (LA-OC-IE)
• Atlanta
• Philadelphia – Central PA – DE – So. NJ (PA/South NJ/DE)

What’s behind the recent contraction in bulk industrial demand and what can CompStak’s data tell us about this subset of the industrial market? Read on for more. 

SHARE OF TRANSACTIONS GOING TO DEALS OF 100,000 SQUARE FEET OR LARGER DECLINED YEAR OVER YEAR IN EACH MARKET EXCEPT PA/SOUTH NJ/DE

While bulk industrial demand is trending down nationwide, the Chicago Metro, LA-OC-IE, Atlanta, and PA/South NJ/DE markets still have a significant share of market activity going to larger transactions with the highest levels charted in the PA/South NJ/DE market since 2018, according to CompStak data. In this market, the share of bulk industrial transactions of at least 100,000 square feet continued its upward trend after the onset of the pandemic in 2020. Notably, the share of all transactions going to bulk deals of 100,000 square feet or more peaked after 2020 in each of the markets except in Atlanta and the PA/South NJ/DE market was the only one where the share increased from 2022 to 2023. Meanwhile, bulk activity’s share declined from last year in three of these four markets, indicative of slowing demand for bulk industrial.

The Philadelphia market’s share of all transactions going to deals of at least 500,000 square feet has also  outpaced the markets of LA-OC-IE, Chicago, and Atlanta over the given period and increased from 2022 levels in 2023. Helping to propel the Philadelphia market in 2023 were transactions such as BlueTriton Brand’s 1,369,000-square-foot lease of 2086 Corporate Center Drive West, in Tobyhanna. Oppositely, the shares of activity  going to deals of at least 500,000 square feet declined from last year’s levels in  LA-OC-IE, Atlanta, and Chicago markets.

BULK INDUSTRIAL DEMAND SLOWING AMID IMPROVEMENTS IN SUPPLY CHAIN AND STABILIZING CONSUMER DEMAND 

Several key economic indicators explain why bulk industrial demand is no longer growing at the past years’ record pace. Overall, global supply chain issues are finally on the decline after several years of tumult. According to the Federal Reserve, the Global Supply Chain Pressure Index (GSCPI) is down 1.41 points from its December 2021 peak as pressures continue to trend down from the historic average. The GSCPI has now remained below the average value for the last nine months of available data through October 2023.  

As a result of these moderating supply chain concerns, many retailers are slowing ordering and stockpiling goods that accelerated in the depths of the pandemic. At the same time, consumer spending has showed some signs of slowing. According to the latest Global Port Tracker report published by the National Retail Federation and Hackett Associates, national import volume has already peaked in 2023 and monthly cargo volumes fell short of monthly 2022 levels from January through August 2023.

In recent years, goods demand surpassed services, leading to a record low in the inventory-to-sales ratio, as per the U.S. Census Bureau’s data on Retailers: Inventories to Sales Ratio. This ratio is still well below pre-pandemic levels but has ticked up recently to 1.3 after reaching a low of 1.1 in April 2021. Generally, an increasing inventory to sales ratio indicates slowing demand as companies stock more inventory than they expect in sales. Anticipating potential supply chain shortages, retailers are forecasted to maintain higher inventory levels compared to historical practices. However, the deceleration in import volumes suggests that further inventory expansion might be limited, thereby moderating the demand for bulk storage and logistics space.

According to the Logistics’ Managers Index (LMI),  a monthly survey including over 100 logistics professionals on the movement and direction of eight key logistics metrics, warehouse capacity was much lower a year ago. The LMI demonstrates that industrial users are encountering less instances of space shortage than they were at this time in 2022, which may also be influencing a pullback in bulk industrial transactions. Warehouse capacity registered at 57.3 points in September, down -3.4 from August’s reading of 60.4, but up by 15.0 points from September 2022. Logistics managers reported reduced warehousing utilization year over year, attributed to using less existing space or encountering fewer shortages for their operations and inventory. Overall, these statistics reflect that firms are able to move to leaner inventory management as supply chain issues and robust goods demand abate.

WHICH LANDLORDS AND TENANTS TOPPED THE CHARTS FOR BULK TRANSACTIONS IN COMPSTAK DATA SINCE 2020?

When reviewing the top tenants and landlords involved in bulk transactions in the markets of LA-OC-IE, Chicago, Atlanta, and PA/South NJ/DE, a few patterns emerge. Companies such as Amazon.com and Home Depot dominated as tenants in transactions of 100,000 square feet as well as those even larger at 500,000 square feet and above since 2020.  Meanwhile, landlords like Prologis and Blackstone appeared at the top of the ranks for landlords. 

Tenants ranking high for bulk transaction activity in CompStak’s data are heavily concentrated in the areas of e-commerce, third-party (3PL) logistics, and brick and mortar retail sectors. Their rankings are indicative of the influence that online retail and logistics continue to have in the bulk industrial market. Amazon.com’s growth during the pandemic, fueled in large part by shopper’s preference for online retail, propelled it to the spot of top tenant in transactions 100,000 square feet and larger in all four of these major markets. The e-commerce giant was joined by Home Depot at number two in the rankings in both the LA-OC-IE and Atlanta markets, as well as number three in Chicago, suggesting that brick and mortar retailers were also significant drivers of bulk demand. Other brick and mortar retailers, like Target, and Lowe’s also ranked highly among even larger transactions of 500,000 square feet and above. In terms of top landlords in transactions of 100,000 square feet and above, Prologis, the logistics real estate investment trust, nabbed the top spot in all four markets, and continues to be one of the largest industrial landlords in the United States.

DOMINANT BUILDING CHARACTERISTICS IN BULK TRANSACTIONS: NEW CONSTRUCTION AND HIGHER CEILING HEIGHTS

According to CompStak’s data, there is a clear correlation between newer construction and transaction size in industrial deals completed since the beginning of 2020— the largest of transactions took place in the newest buildings, on average, across most of these markets. The spread between the average built year for buildings inking transactions of 500,000 square feet or larger as compared to transactions smaller than 100,000 square feet completed ranges from 21 years in the Chicago metro market to 26 in the PA/South NJ/DE market. The spread in average building age is significant when comparing properties with transactions above 100,000 square feet to those below—this ranges from 12 years in the Chicago metro market and Los Angeles/Orange County/Inland Empire to 21 in the PA/South NJ/DE market. Per CompStak’s data, buildings capturing transactions over 500,000 square feet since the start of 2020 have an average built year in the 2000s.

Over the past few years, tenants completing bulk transactions favored buildings with higher maximum ceiling heights. Ceiling heights are critical because users are seeking maximum space in a building envelope, which includes maximum usable contiguous floor area as well as the most internal cubic space. In CompStak’s data, buildings with transactions of 500,000 square feet or more completed since 2020 had the highest average building ceiling height, followed by transactions of 100,000 square feet or more. Meanwhile, transactions completed with footprints smaller than 100,000 square feet were in buildings with average ceiling heights of 25 feet or less across each of these four major markets. 

Modern, new industrial construction features taller ceilings, meeting user preferences for a minimum height of 36 feet. CompStak’s data bears this out— the average year built for industrial buildings with ceiling heights of 36 feet or higher is 2014. This is more than 25 years newer than buildings with lower ceiling heights involved in transactions across these four markets since 2020.

SINCE 2020, THE PREMIUM FOR THE AVERAGE STARTING RENT PER SQUARE FOOT IN SMALLER TRANSACTIONS RELATIVE TO BULK TRANSACTIONS HAS DECLINED

Prior to 2020, the average starting rent per square foot for transactions of less than 100,000 square feet well exceeded the average for transactions of 100,000 square feet or more in CompStak’s data. In 2019, the average starting rent for transactions smaller than 100,000 square feet ranged from 39.3% (PA/South NJ/DE)  to more than 57.3% higher (LA/OC/IE) than the average starting rent for deals above that threshold across these four major markets. However, since 2020, this premium narrowed as demand for supersized spaces took center stage. This dynamic was strongest in the LA-OC-IE market where the premium narrowed each of the past four consecutive years from 57.3% in 2019 to 8.3% in 2022. In 2023 to date, the average starting rent for 100,000 square feet or larger transactions actually slightly exceeds pricing for those below that size in that market. In the PA/South NJ/DE market, the premium has also substantially narrowed to 13.7% as of this year so far. 

DWINDLING CONSTRUCTION PIPELINE COULD MEAN LACK OF BULK INDUSTRIAL OPTIONS GOING FORWARD

A moderation in large transactions inked is due to a drop in demand, but vacancy rates have also slightly increased due a record amount of industrial deliveries this past quarter. The third quarter yielded the highest level of new industrial deliveries on record per Cushman & Wakefield’s latest report.  However, new construction starts are slowing which means lower levels of deliveries going forward through 2024 as a result of both rising interest rates as well as growing pushback and warehouse moratoriums on large scale industrial development. According to CBRE’s latest national industrial report, construction starts fell more than 37% quarter over quarter in Q3 and are now down more than 64% from this time last year. Data from Dodge Construction Network demonstrated a similar trend—nonresidential construction starts are down 7% year over year based on September 2023 figures.  Since new construction mainly offers the substantial footprints as well as high ceiling heights that bulk users require, users may face shortages again.