To meet burgeoning demand, a 1,114,575-square-foot warehouse is being built by Saddle Creek Logistics adjoining existing facilities at the CenterPoint Intermodal Center-Joliet, about 60 miles from Chicago.
To meet burgeoning demand, a 1,114,575-square-foot warehouse is being built by Saddle Creek Logistics adjoining existing facilities at the CenterPoint Intermodal Center-Joliet, about 60 miles from Chicago.

Historically low US warehouse vacancy rates are driving up rental costs and spurring increased build-to-suit and even speculative development of facilities that, according to industry leaders, can’t be built fast enough to meet demand in many markets.
Executives from third-party logistics, development and broker sectors tell the American Journal of Transportation that they expect demand will continue to outstrip supply in a market characterized by generally favorable economic conditions and growing volumes moving through seaports and inland logistics hubs.

Not surprisingly, in such a tight market, rental rates for U.S. warehouse space rose 9.9 percent last year, according to a recent report from Los Angeles-based CBRE Group Inc., the world’s largest commercial real estate services and investment firm. The report cites lack of new supply, as well as needs of online retailers seeking to be close to consumers.

Overall, the vacancy rate for US warehouse space has dropped to 6.5 percent, a 15-year low, according to Rob Pericht, senior vice president of customer solutions and operational development at Lakeland, Fla.-based Saddle Creek Corp., which, as owner or leaseholder, operates more than 17 million square feet of space, including 3.8 million square feet opened in six markets over the past 12 months.

The market is even tighter in some areas. For example, in Southern California’s Inland Empire region, the warehouse vacancy rate has fallen below 2 percent, Pericht said, adding, “That would almost be classified as complete saturation.”

Rob Pericht, Senior VP of customer solutions and operational development at Saddle Creek Corp., perceives a fine line between market demand and overbuilding of warehouse facilities.
Rob Pericht, Senior VP of customer solutions and operational development at Saddle Creek Corp., perceives a fine line between market demand and overbuilding of warehouse facilities.

Pericht said the current low-vacancy situation is being driven in large part by the fact that, over the past two to three years, developers have been more cautious not to overbuild and focused more on build-to-suit than speculative endeavors, following a five-year period when vacancy rates were extremely high. Furthermore, the cost of capital remains favorable for new projects, Pericht said, commenting, “That’s a good thing, because it has to off-balance the cost for new construction, which has become more expensive. It’s become more expensive to build new buildings, but that’s offset by lower interest rates, and developers don’t want to be stuck with inventory.

What helps us be successful in that arena is that we work with the commercial real estate partners and developers directly, and we collaborate with our customers, so that we make timely, informed decisions,” Pericht said. “And that, in that past three-year period, has taken up a major focus for us on where we’re going to build and how much we’re going to build. It emphasizes the fact that you have to have good partners.”

Pericht said Saddle Creek concentrates on particular large user blocks, including major e-commerce operations that may take 1 million square feet at a time, noting, “When they decide to go into a market, those buildings are snatched up before they even come out of the ground.

“That adds to the concern on lead times,” he continued. “As the lead times get pushed out, that really impacts spec [speculative] space. So, if you’re timing isn’t right, and you need to be in a certain market and can’t wait for the year-plus to build a building out of the ground, then you’re going to look at speculative space, and that’s also what’s driving the [vacancy] rate so low.

“There’s a fine line between meeting market and overbuilding,” Pericht said, pointing out that strategies tend to be market-specific.

California and Northeastern Pennsylvania’s Lehigh Valley have seen precipitous drops in vacancy rates, he said, while markets such as Dallas and Atlanta “have really taken off in the last couple of years, and they run a risk of overbuilding, simply because of the size of the market.”

“If you’re not ahead of the curve, then you’re going to play catch-up,” Pericht said, noting that Saddle Creek does not typically build or lease on speculation, except to meet the company’s strategic growth objectives in specific geographic areas. “We are poised to make decisions on build-to-suits or leases based on our collaboration with our customers. So I’m not going to say we’re ahead of the curve; I would say that we’re smack in the middle of it.”

Pericht said Saddle Creek has built additional space outside Chicago on speculation, which has proven fruitful, and also is doing so on its campus in the Dallas-Fort Worth area and between Tampa and Orlando in Central Florida, on company-owned property, thus presenting lower risk.

A particularly thriving area for recent warehouse development has been the CenterPoint Intermodal Center-Joliet, about 60 miles southwest of downtown Chicago, where multiple Class I railroads have intermodal yards.

CenterPoint Properties’ chief development officer, Michael P. Murphy, said he believes exceptionally strong user demand for new facilities is a key factor in the current national situation. He said users are looking to accommodate organic business growth while seeking greater efficiencies through consolidation of facilities and labor forces.

“The good news, from the industrial perspective, has been really good growth in big retailers, third-party logistics firms, even some clear benefit from near-shoring – a lot of manufacturing going on in Mexico – and automotive and electronics manufacturing in the Southeast,” he said.

Danny S. Chase, Savannah, Ga.-based principal of Colliers International, sees demand for warehouse facilities continuing to outpace supply in key Southeast markets, with Panama Canal expansion exacerbating the situation.
Danny S. Chase, Savannah, Ga.-based principal of Colliers International, sees demand for warehouse facilities continuing to outpace supply in key Southeast markets, with Panama Canal expansion exacerbating the situation.

Murphy cited BMW, Mercedes-Benz, Volvo and Boeing Co. in the Southeast and, on the West Coast, Tesla Motors, high-end manufacturing outside Silicon Valley and organic growth in the Seattle area. The Seattle market, he said, presents particular challenges as it is land-constrained, while development in California requires going through time-consuming environmental regulation processes. “Nationally, you have great user demand, you definitely have had significant capital flows into the industrial market, but spec development has barely kept up with user demand,” Murphy said.

Echoing Pericht’s observation. Murphy pointed out that significant new spec product is hitting the market in the Dallas and Atlanta areas, adding, “After that, it’s really been user demand outpacing new space supply, even in a pretty liquid capital market timeframe.

“There’s a lot of capital, a lot of desire to do new projects and a lot of user demand,” he continued. “The pace of new spec has been reasonable. We haven’t gotten too ahead of ourselves in the last year and a half throughout the country.

“User demand has continued to drive vacancies lower, create rental growth and really kept most of the national industrial markets beyond equilibrium, in very tight occupancy, very low vacancy conditions,” Murphy added, saying that macroeconomic forces and the upcoming presidential election could have impacts.

He said sustained growth in activity not just at seaports but also at inland ports and rail transfer facilities should continue to fuel user demand and new product development.

Murphy said Oak Brook, Ill.-based, CenterPoint, which traditionally has primarily been a build-to-suit developer, has taken on more spec undertakings, continuing to develop and acquire in markets seen as likely to remain strong as far as user demand and port and rail flows.

“We have had the joy of getting leased before our spec buildings were delivered,” he said,” and our hope is that trend will continue.”

In particular, Murphy noted successes with ongoing activity in Savannah, Ga.; Charleston, S.C.; upstate South Carolina; Chicago; Seattle; Oakland; Los Angeles and Houston.

Southeast hubs such as Savannah and Charleston are benefiting from growing import activity that got a boost last year in large part due to shippers shifting some cargo from labor-stressed U.S. West Coast ports, according to Danny S. Chase, Savannah, Ga.-based principal of commercial real estate services leader Colliers International.

“Much of that cargo sticks,” Chase said, adding that beneficial cargo owners seem to be maintaining supply chain diversification strategies. “The product tends to stay here.”

Chase said he believes demand for warehouse facilities will continue to outpace supply in such key Southeast markets, with the Panama Canal expansion exacerbating that situation. Also, he said, the harbor deepening project now under way in Savannah should, when completed, lead to further volumes entering what already is the nation’s fourth-busiest containerport.

“The developers are scrambling to take down additional land both for spec and build-to-lease,” Chase said. “The last few spec buildings have been leased before they were finished being built.”

Examples of such leased-before-completed spec buildings cited by Chase include a 316,000-square-foot CenterPoint cross-dock facility in Garden City, Ga., less than 4 miles from Port of Savannah containership berths, and Atlanta-based TPA Group’s 475,000-square-foot cross-dock installation in Northport Industrial lPark, 6.5 miles from those wharves.

In the Savannah area, Chase said, warehouse vacancy rates have been in the 2 percent to 3 percent range for the past six to 12 months, with users having to look as far as 30 to 40 miles from the port to fulfill needs.

“I can’t see it letting up unless all the developers jump in with the build-it-and-they-will-come mentality,” he said.

That, Chase said, is unlikely, as developers recall getting burnt a few years back during the Great Recession and may be hesitant to jump back in with an investment of $15 million to $20 million for a spec building. He added that such price tags have been rising as costs for labor and commodities like concrete and steel, as well as land, have escalated.

“The market is very active to stay ahead of this situation, but the demand is outpacing the supply currently,” Chase said. “The Georgia Ports Authority is definitely concerned, because, when people come calling, if we don’t have anything available, the cargo is going to another port.”

Chase said other markets that are “on fire,” such as inland hubs of Atlanta, Dallas and Chicago, could begin to encounter similar concerns with cargo activity going elsewhere if there is not sufficient warehouse inventory.

To avoid such circumstances, he said, “Developers are scrambling to buy and build as fast as they can.”