{"id":1004714809,"date":"2024-05-29T18:09:14","date_gmt":"2024-05-30T02:09:14","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004714809"},"modified":"2024-10-01T00:41:14","modified_gmt":"2024-10-01T08:41:14","slug":"how-logistics-developers-can-surmount-inventory-hurdles","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/how-logistics-developers-can-surmount-inventory-hurdles\/","title":{"rendered":"How Logistics Developers Can Surmount Inventory Hurdles"},"content":{"rendered":"\n

If it\u2019s one thing that industrial tenants can\u2019t seem to get enough of, it\u2019s logistics-focused industrial space. Despite indications of slowing growth, several key fundamentals are still positive. Rents grew 7.3 percent year-over-year, according to CommercialEdge\u2019s latest national industrial report, even with an uptick in vacancy rates to 5.2 percent driven by more than 1 billion square feet of new supply.<\/p>\n\n\n\n

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READ THE DIGEST<\/strong><\/a><\/div>\n<\/div>\n\n\n\n

Still, this two-year supply high is expected to decline, as interest rates, construction costs and regulatory roadblocks are likely to further hamper development plans. The CommercialEdge report found that new starts are starting to dry up, resulting in a one-third decline in new inventory over the next two years.<\/p>\n\n\n\n

But what does this look like on the ground? Economic hurdles are only part of the challenge. What\u2019s equally difficult is providing the qualities needed to replace a national inventory that averages 44 years old, according to CBRE.<\/p>\n\n\n\n

\"Renderings
Rendering of Nexus San Leandro, an industrial facility based in the Bay Area built in the 1960s. According to Lowney Architecture, many of the building\u2019s specifications do not meet the needs of modern tenants. The property was fully redeveloped to a class A industrial building focused on sustainability by reusing parts of the existing structure, while also enhancing functionality with a higher 40-foot ceiling and an expanded truck court to meet today\u2019s market needs. Prologis, the developer, plans to include rooftop solar panels and electric vehicle charging stations. Image courtesy of Lowney Architecture<\/em><\/figcaption><\/figure>\n\n\n\n

Enter logistics 2.0<\/h2>\n\n\n\n

Where the demand for new product stock often crops up is in such features as automated packing systems and highway access. Mary Lang, head of Americas direct logistics strategies at CBRE Investment Management, refers to this new generation of supply as \u201clogistics 2.0.\u201d<\/p>\n\n\n\n

These facilities are centered on coastal shipping hubs and high-growth population centers, where developers are \u201ctrying to aggregate around (metros) that have the highest number of consumers,\u201d according to Lang. <\/a>In those markets, it may be difficult to fulfill tenants\u2019 needs due to aging stock and prohibitive capital costs.<\/p>\n\n\n\n

Charlie Meyer, president of Lovett Industrial, has observed this trend around the growing eastern, western and southern markets where his firm operates. \u201cWhen you think about where that supply has to go, it\u2019s more around the periphery of cities, so most of the traditional submarkets have been completely built out,\u201d he noted.<\/p>\n\n\n\n

\"Cameron
Cameron Industrial, a modern two-building industrial park being built in Gilroy, Calif. The project will include a mix of warehouse, manufacturing and office spaces. Image courtesy of Lowney Architecture<\/em><\/figcaption><\/figure>\n\n\n\n

But which tenants seek to occupy these facilities? According Tom Simmons, a vice president at Majestic Realty Co., many are third-party logistics providers which may be tenants for relatively short stints, and whose goods \u201care packed and sorted once they come in. They\u2019re coming in faster than it would typically be for the users of old.\u201d<\/p>\n\n\n\n

With this need for speed in mind, particularly as annual e-commerce sales are projected to reach<\/a> $656 billion by 2029\u2014a 54 percent increase from 2024\u2014the technology inside and around logistics space is equally important.<\/p>\n\n\n\n

\u201cWe are seeing a lot more automation, robots and AI being deployed within the warehouse, and this actually changes the specifications for construction,\u201d Lang observed.<\/em> She sees the future as characterized by \u201cautomated racking systems that increase the density of storage within the warehouses, or deploying solar arrays on the roof in order to power EV truck fleets,\u201d at a time when electric truck deployments more than tripled<\/a> from 2022 to 2023.<\/p>\n\n\n\n

\"Northwest
Northwest Dade Logistics Center II, a 462,954-square-foot industrial campus being built by The Easton Group. Projects like these are becoming more and more difficult to build around Miami, in part due to the high costs of living that construction workers often cannot afford. Photo courtesy of LBA Logistics<\/em><\/figcaption><\/figure>\n\n\n\n

Construction hurdles<\/h2>\n\n\n\n

These issues further complicate development, on top of the long-running capital markets crunch. \u201cLandowners of the past 15 years don\u2019t need to sell, transactions will be down dramatically, and leasing activity may not meet the (needs) of the actual building,\u201d said Edward Easton, chairman of The Easton Group. The firm has several industrial developments underway around Florida\u2019s Broward and Miami-Dade counties, where the cost of living is high and average land costs are the highest in the state<\/a>.<\/em><\/p>\n\n\n\n

Supply-demand pressure is a factor, as well. A recent analysis<\/a> found that construction costs are expected to jump between 2 and 4 percent this year. Todd Zabelle, founder of the Project Production Institute and the author of the recently published Built to Fail: Why Construction Projects Take So Long, Cost Too Much, and How to Fix It, <\/em>calls these struggles the \u201cperfect storm.\u201d A shortage of nearly half a million construction workers is coupled with demand for building materials that often are imported from Asia. \u201cTo meet the world\u2019s need for floor plate, you would have to build the equivalent of a Paris every week or a New York every month,\u201d he noted.<\/p>\n\n\n\n

As Majestic Realty\u2019s Simmons notes, the cost of building new industrial product has jumped by leaps and bounds in the past several years. As recently as 2019, he recalled, you could get a new facility up and running at around $100 per square foot. But today, \u201cyou can find yourself at $150 to $175 to try and reconstruct that same warehouse,\u201d he said.<\/p>\n\n\n\n

Even when a suitable parcel can be found, many developers, particularly those operating in regulation-intensive states such as California, have found it difficult to make new development work financially. Such hurdles can hold up project delivery for years.<\/p>\n\n\n\n

In Southern California\u2019s key markets, capital costs, zoning restrictions and regulatory hurdles regularly stifle development. A shortage of building inspectors and changing building codes compound these challenges. \u201c10 to 15 years ago, (it) would have taken 12 months to build, and now these projects are taking three years,\u201d said Patrick Schlehuber, chief investment officer at Rexford Industrial.<\/p>\n\n\n\n