Industrial & Logistics
U.S. Real Estate Market Outlook 2022
2022 will be another banner year for industrial real estate
On the heels of record transaction volume and rent growth amid extremely tight supply and high demand, the industrial real estate market will remain very strong in 2022. Demand will primarily be driven by growing e-commerce sales, the improving economy, population migration and the need for onshore “safety stock” inventory to avoid the supply chain disruptions of the past 18 months.
E-commerce sales exploded at the onset of COVID-19, rising to 21.6% of total retail sales in Q2 2020, up from 16.2% in the previous quarter, and are still above pre-pandemic levels at around 20% as of Q3 2021, according to CBRE Research. With consumers continuing to buy more goods online, e-commerce will keep expanding in 2022. Demand for space from e-commerce will trickle down the supply chain from retailers to wholesalers, who will need to hold more inventory. These businesses will continue to outsource to third-party logistics companies (3PLs) at a greater clip due to rising costs, a lack of available space in highly populated areas and challenges with finding enough workers to operate facilities.
Supply chain volatility will drive demand
The top concern for occupiers in 2022 will be rising transportation costs and supply chain delays. The cost to ship goods via ocean freight increased more than 200% in 2021 and the cost for domestic freight increased over 40%, according to Drewry Supply Chain Advisors and the Cass Freight Index. While the increases may ease as 2022 unfolds, transportation costs will likely remain elevated for the foreseeable future. Manufacturers are still not at full capacity amid pandemic-related shutdowns, and it will likely take them until 2023 to fully recover.
At the same time, demand for goods will continue to rise, leading to increased competition. This demand will keep supply chain costs elevated, including transportation. Transportation costs make up 40%-70% of a company’s total logistics spend, while fixed facility costs, which include rent, make up only 3%-6%, according to CBRE’s Supply Chain Advisory. While rents will continue to rise significantly, it will pale in comparison to rising transportation costs. Therefore, companies will continue to lease more space to cut down on transportation costs.
The top concern for occupiers in 2022 will be rising transportation costs and supply chain delays. The cost to ship goods via ocean freight increased more than 200% in 2021 and the cost for domestic freight increased over 40%.
Outsourcing to accelerate in 2022
3PLs led industrial leasing activity in 2021 with a market share of 30%, compared with 13% for e-commerce. 3PLs will expand further in 2022 as companies look to reduce direct logistics costs and avoid the hassle of finding space in record tight markets with limited labor availability. As a result, 3PLs’ market share will increase in most U.S. markets as vacancy rates decline, rents increase and labor markets further tighten, leading to a projected leasing market share of 35% by year’s end. Notwithstanding, 3PLs will need to overcome labor shortages, leading to the greater use of automation and other technologies to lower the reliance on human labor.
Manufacturing on the rise
Companies will also look to onshore more manufacturing. U.S. manufacturing output was solid in 2021, bolstering real estate fundamentals for manufacturing space, including positive net absorption, lower vacancy rates and record-high rents. This will continue in the coming year with technology, defense, automobile and medical companies leading the way. While demand for manufacturing facilities will increase in traditional Midwest and Southeast markets, Arizona, Texas and Florida are expected to be the top growth markets for manufacturing real estate in the coming year, largely because of growing populations, available land and business incentives.
Figure 10: 3PLs Capture Larger Market Share, 2020, 2021 and 2022 (Projected)
Source: CBRE Research, August 2021.
Emerging logistics markets
The top emerging markets for distribution facilities will once again be those with growing populations and superior logistics hub connectivity. Population growth will be robust in the Southwest and Southeast, stimulating demand for logistics real estate in those regions. Markets like Nashville, Las Vegas, Reno, Central Valley California, Salt Lake City, Central Florida, San Antonio and Austin should see significantly more activity in 2022. As companies look to alternative transportation modes, occupiers will also flock to inland port markets with air and rail connectivity like Louisville, Memphis, El Paso, Columbus, Indianapolis, Kansas City, St. Louis and Greenville.
Supply pipeline keeping up with demand
A record-setting 448.9 million sq. ft. of space was under construction as of Q3 2021. The elevated level reflects both projects that broke ground in 2021 and 2020 starts that were unable to be completed amid the COVID-19-related disruptions. Still, occupier demand continues to outstrip supply. If this trend continues in 2022, availability will remain tight, particularly for Class A space, leading to a higher number of lease renewals. While this will support high rents, it may slow the pace of new leasing activity in 2022.
Investors bidding up assets in emerging markets
Robust investor appetite for industrial assets will push up prices and further compress cap rates across markets and product types in 2022. The cap rate spread between primary and secondary markets will continue to narrow in 2022. Phoenix and Las Vegas will post cap rates in line with the Inland Empire, Indianapolis and Columbus cap rates will drop to Chicago levels, and prices in the PA I-78/81 Corridor will come close to those in the New Jersey markets. We also expect Northern and Central Florida cap rates to approach those of South Florida in the coming year. With institutional capital flowing into the market, it will remain difficult for new investors to find Class A space to purchase. As a result, we expect more capital to target Class B facilities, lowering cap rates for this product type.
Figure 11: Cap Rate Compression Continues for Industrial Assets
Source: CBRE Research, Q3 2021.
Trends to watch
- Automation on the rise
Increased demand from industrial occupiers, combined with an extremely tight job market, will lead to the expansion of automated technology and robotics. Since automation will require building amenities found mostly in newly constructed facilities, this will increase the demand for first-generation facilities in 2022 and beyond.
- ESG to impact industrial
Given the need to reduce carbon emissions, the industrial sector will face more regulatory pressure, particularly for energy efficiency. While much of this effort will likely be focused on improving passenger and freight transportation efficiency and reducing manufacturing emissions, warehousing may be impacted as well. Consequently, developers may use more sustainable construction materials like timber instead of concrete and steel.