Industrial Experts Address Challenges Amid Historic Demand
While the specifics may be different, the industrial sector is lighting up across the western region. In Seattle, Los Angeles, and Reno, a scarcity of industrial land availability is prompting developers to move further away from core market areas, and in Portland and Phoenix, the truck driver shortage is adding further challenges to a sector supercharged by the e-commerce boom. In San Diego, add in a scorching life science sector and enormous national investor appetite.
In all instances, inventory is tight. “San Diego has experienced absorption and rent growth like we’ve never seen before,” says Bob Willingham, SVP at Kidder Mathews in San Diego. “We’re seeing a ton of demand from life science companies.”
“With vacancy rates posting under 1% in certain size segments, we have virtually no product to accommodate tenant’s space requirements in the Central Los Angeles Market,” says Jon Reno, SVP & managing director of Kidder Mathews Los Angeles.
Challenges persist in Portland as well, according to Kidder Mathews EVP & managing director Steven Klein, who is based there. “With the shortage of developable industrial land in the Portland area, developers and users are pushing farther out of the city to secondary locations,” he says.
In the Puget Sound, Brian Hatcher, president & COO at Kidder Mathews, says, “driven by the strength of e-commerce, larger facilities are leasing before smaller facilities, rents are continuing to rise, and larger land acquisitions are trending further north and south away from Seattle where the available land is located.”
Markets away from the coasts are seeing similar scarcity. In Phoenix, Kidder Mathews SVP Mike Ciosek says, “E-commerce has lit a fire in the distribution sector. Institutional developers have been at the forefront of the acquisitions, and tenants have followed close behind, absorbing the newly constructed space.”
And in Reno, Michael Nevis, EVP & managing director at Kidder Mathews there, reports historic low vacancy, rent growth and absorption. “We have never witnessed anything remotely close to these market dynamics,” he says.
In the San Diego metro, life science companies have moved beyond office conversions close to the historic life science hubs to buying low-rise office and flex properties with plans to demo and redevelop the buildings. Willingham likens it to a “perfect storm of supply and demand imbalance” when you consider the lack of development pipeline and rise of e-commerce.
Speed-to-market plagues Phoenix as well, due in part to the shortage of construction materials and a limited capacity in some municipalities hit by COVID. “It’s translated into a market that has increased rental rates, higher construction pricing, and fewer immediate choices,” Ciosek says.
A similar but slightly different challenge is impacting the Portland market. “Workforce issues continue to be the headline in our market,” says Klein. “Every company we talk to is having difficulty hiring, and we don’t see this easing in the near future. Lack of truck drivers is the issue we hear most often. Without drivers, supplies and goods don’t move.”
Prices have gone considerably higher for industrial product in the most desirable San Diego locations, including $400 to $500 per square foot for single-tenant, infill NNN properties.
Industrial experts across the West Coast note a sharp increase in land prices. Klein reports that land prices are nearly doubling in some cases, while Willingham has been seeing cap rates compressing to below 3% in some instances, compared to 4.5% pre-pandemic.
Rent growth has continued in every market, an environment that favors larger players. “Minimum 4% annual escalations on new leases are standard now,” says Reno of the Los Angeles market. “We are seeing counteroffers trending at 5% currently.”
“The combination of continued cap rate compression and rising rents has led to sales prices for better institutional-quality product far exceeding what anybody had imagined two to three years ago,” says Willingham.
“The levy that has historically held back some national institutional developers in the Phoenix market has broken,” says Ciosek. “I’ve heard multiple times now that many site selection groups are labeling the Phoenix market as constrained when it comes to finding new opportunities in the market.”
“Developers are scrambling to get projects approved and off the ground as quickly as possible due to the continued demand going into 2022,” says Nevis.