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Area Development

In Focus: “Golden Age” of Spec Development

The e-commerce revolution and its related supply chain challenges have created a surge in spec development of industrial and logistics space.

Q3 2022
From coast to coast, demand for new warehouse and distribution space is hitting record-breaking levels. According to a recent report from Cushman & Wakefield,1 the U.S. industrial construction pipeline topped 600 million square feet for the first time ever in Q1 2022, with nearly 95 percent of that tally classified as warehouse/distribution product. Net absorption hit a staggering 108 million square feet in Q1, with 10 different markets posting more than five million square feet of new leasing activity from January to March.

Yet despite those eye-popping numbers, demand is still running significantly ahead of supply as industrial vacancy rates hit a new all-time low (3.3 percent). This vacancy rate along with absorption is creating a speculative development boom like no one has ever seen. Speculative builds, which are simply facilities that are developed and constructed without a signed lease in place, now account for three out of every four warehouse/distribution center projects nationally. Developers are willing to take on more risk given the market demand and with many projects pre-leasing months before the end of construction due to the supply-demand imbalance.

Demand is still running significantly ahead of supply as industrial vacancy rates hit a new all-time low (3.3 percent). What’s Driving the Spec Boom?
The pandemic has altered consumer habits and during the height of the shutdowns these habits became more permanent. The e-commerce revolution has been the primary driver of spec development, as consumers have now become accustomed to the ease and convenience of online shopping for a variety of goods. A report from FTI Consulting indicates that online will comprise one-third of all retail sales by 2030, with many companies now pivoting accordingly.

Recent supply chain challenges have also been a key driver of the spec development surge. With many products and goods being held up at coastal ports and overseas, companies and third-party logistics providers need to thread the needle by setting up shop in areas that allow them to work around those challenges and optimize their delivery strategies. Having a move-in ready logistics warehouse that has modern technology and is in close proximity to major airports, highways, and rail routes provides an immediate competitive advantage. That’s why industrial port markets and other primary markets, like Atlanta, Chicago and Dallas, are growing the fastest, with nearly 60 million square feet of new product under construction in DFW alone. However, emerging markets with strong logistics networks like Central Florida, Savannah, Austin, and Nashville are also capturing more demand.

Industrial port markets and other primary markets, like Atlanta, Chicago and Dallas, are growing the fastest. The intense competition for available land in several markets means companies will need to become more comfortable pushing out to the periphery. Construction cost increases will inevitably be passed on to end-users through the form of higher rents. That means many corporate real estate decision-makers will need to be creative and adjust supply chain networks to these periphery locations where rents are slightly cheaper and 75–80 percent of the population can still be reached.

Who’s Investing?
In addition to traditional development firms, pension funds, institutional investors, publicly traded REITs, and private wealth are all pouring into spec development. With rising rents and record high absorption, major financial institutions have shown a healthy appetite for industrial and logistics space across both gateway and secondary markets.

Speculative development for major warehouse and distribution projects will continue to command market share for the foreseeable future given the state of the current environment. Many businesses simply don’t have time to wait and need new facilities yesterday. Savvy e-commerce providers and distributors who need a leg up in this ultra-competitive environment can capitalize by partnering with entities that specialize in spec and build-to-suit development and logistics solutions tailored for each organization, allowing users to focus on their core business activities.

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