The unprecedented boom in demand for logistics warehousing dates back about a decade. For most of the last 10 years, it was a safe bet that the aging of the industrial warehouse stock was not considered a priority. Stakeholders had their hands full to meet capacity demand that hit like a ton of bricks and barely waned.
Yet the warehouse inventory hasn’t gotten any younger, and in some markets it’s outright aging. In a March report, real estate services giant JLL Inc. (NYSE: JLL) estimated that the average age of industrial warehouses nationwide is 42 years. Buildings built more than two decades ago account for three-quarters of total industrial supply, with more than a quarter of all inventory over 50 years old, JLL said.
Newmark Group Inc., (NASDAQ: NMRK), a real estate consultancy, estimated that nearly a third of US industrial stock is over 50 years old and 55% of inventory is between 10 and 50 years old. Only 14% of warehouses are less than 10 years old, he says.
In Chicago, the hottest industrial property location in the United States, the average age of a warehouse is 48 years old, according to data from Newmark. In northern New Jersey, another major industrial center, he is 56, according to the data found. In contrast, in Las Vegas, which is one of the newest hotbeds of logistics warehouses, the average age of warehouses is 24 years. Perhaps unsurprisingly, much of the older inventory is in well-established centers of population and commerce like the New York/New Jersey metro area, Chicago, and Los Angeles.
Aging supply presents another headache for an industry struggling to find capacity, with nationwide vacancy rates hovering just above record highs of 3%. Tenants could manage in their current locations. However, in many cases, existing designs are not adequate to meet the demands of modern distribution.
In a May 2021 study, Cushman & Wakefield plc., a real estate services company (NYSE: CWK), found that more than half of warehouse inventory built before 2000, which made up about 70% of inventory there a year old, had a ceiling height of 27 feet or less. Yet occupants of large-area facilities of 500,000 square feet or more require unobstructed ceiling heights of 32 to 40 feet to accommodate mezzanine structures with higher product stacking capacities, according to a needs analysis occupiers by Cushman’s industrial leaders.
Anything less than 32 feet tall, they said, was considered obsolete in a world where much of the new warehouse design is vertically oriented largely due to land scarcity. Even occupants of multi-tenant buildings under 500,000 square feet required clear heights of 32 to 36 feet, according to the Cushman survey.
Other issues that could arise with older facilities include insufficient space for trailers, an insufficient number of dock doors, outdated floor slabs, and lack of access to proper power and sprinkler systems. , to name a few, Cushman said. “Unless the facility has been completely gutted and refurbished, the obsolete product simply isn’t usable for some occupants,” said Carolyn Salzer, Cushman’s director, logistics and industrial research manager for Americas.
The Challenges of Rebuilding Warehouses
Much of the old logistics warehouse stock is being demolished and rebuilt, rather than structures being altered. However, the rebuilding process is not an easy, quick or cheap task in an environment of labor and material shortages, and higher costs for both. Labor is easier to find in high-density urban areas where most of the older facilities are located. In outlying areas, available workers are more difficult to find due to smaller populations and mobility issues to get to project sites.
Completion of projects is delayed up to six months due to labor and material constraints, said Lisa DeNight, Newmark’s national director of industrial research. head of industrial research. Besides the delays, the increases in construction costs are “incredible”, she said.
A separate Cushman report released within the past two months quantified DeNight’s view. Last August, the price of steel tripled from the 10-year average between 2010 and 2019. Costs for concrete, roofing materials, fixtures and other warehouse construction necessities also increased. In many cases, the current cost of materials alone has exceeded what it would have cost several years ago to build an entire warehouse, Cushman said.
Steel shortages caused the most angst, according to the study. Before the pandemic, delivery times for steel orders for custom warehouse construction were around 12 months. Today, it is between 16 and 18 months old and is expected to get worse before it gets better, according to the report. Relief is not expected to arrive until 2023, according to the report.
All of this means higher costs for the end user. National average asking rents reached $7.24 per square foot in the first quarter, the first time asking rents exceeded $7 per square foot. Yet, it is expected that there will be little resistance from tenants because they need the space and because warehousing represents a relatively small portion of the cost of goods sold.
There is no miracle solution to modernize the supply of warehouses in the country. The balance of supply and demand for materials will eventually recover, although its speed will likely be dictated by the ability of China, the world’s largest steel producer, to increase production. Labor availability remains a problem. Other sources of supply will be explored, such as the conversion of obsolete office buildings for industrial use, and the possible remediation and renovation of contaminated land. Newmark estimated that there are about 500,000 such sites nationwide.
Markets with a higher percentage of “second generation” facilities have the opportunity to repurpose and retrofit them to meet the needs of users who will compromise the quality of space if their business model requires them to be located in urban population cores, JLL said in its March Report. Occupants “adapt to older, smaller, and less functionally sophisticated spaces, as there are very few modern facilities in urban centers,” according to the report.
Eventually, the White Knight will be a massive, long-lasting offering that hits the market. About 660 million square feet of space is currently in the pipeline, according to Cushman data. While demand for this space will remain strong, capacity at these levels will likely provide some relief to a highly stressed logistics warehousing market.
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