With the explosion of e-commerce over the past year and a half, it’s no surprise the industrial sector across the United States is posting significant gains.
In fact, 2021’s national demand for industrial space is up by 22 percent year-over-year, and the market is showing no signs of retreating. This trend comes as a result of increased consumer demand for immediate, contactless deliveries, which has boosted demand for distribution centers that house e-commerce and logistics companies.
The Louisville market, which features major attractors such as the UPS Worldport, two Ford plants, the GE Appliance Park and robust interstate connectivity, has experienced record success in 2021, with several key trends driving this sector’s growth.
1. Explosive leasing
Louisville’s net absorption metrics are approaching historic highs. When COVID-19 hit, nearly all businesses took a 30-day pause to evaluate the implications the pandemic posed. The ensuing change in consumer purchasing patterns and product delivery pushed the national industrial market on a positive trajectory for both absorption and construction starts. Louisville is no exception.
To date, 62 percent of industrial buildings in Louisville were leased prior to construction completion, compared to 25 percent in 2020. In addition, 85 percent of facilities delivered this year have already been leased as of third-quarter 2021, with 45 percent of leased facilities allocated to e-commerce and logistics-related occupiers.
Additionally, total net absorption to date exceeds 6 million square feet, and if anticipated deal traffic holds true, a total of 9 million square feet of net absorption could occur by year’s end. Assuming our intelligence is accurate, net absorption will represent more than 10 percent of the 80 million-square-foot Louisville industrial market.
The wave of leasing activity has created a surge in development as well. Year-to-date, the Louisville industrial market has delivered 3 million square feet of space, with another 8.9 million square feet currently under construction. Comparatively, in 2020, the market delivered 5.5 million square feet.
The market currently boasts a record-breaking vacancy rate below 4.4 percent, compared to an 8.4 percent vacancy rate at year-end 2020 and a 6.9 percent vacancy rate in 2019. Additionally, the market has experienced a boom in institutional investments and record-low capitalization rates, with four recent projects trading at well below 5 percent.
2. E-commerce growth
According to the Census Bureau of the Department of Commerce, U.S. e-commerce sales totaled $222.5 billion in the second quarter of 2021, a 3.3 percent increase from this year’s first quarter. With this massive growth in e-commerce comes the need for suppliers to better control their inventory to meet customer demands.
Historically, it’s been common for suppliers to have their products shipped from overseas. Now, it’s more important than ever for suppliers to be close to their customers. Approximately 51 percent of global retailers now offer same-day shipping to available areas, and 65 percent plan to offer same-day delivery services within a year, further emphasizing the importance of proximity.
To quickly produce goods to meet customer demands of 24-hour delivery times, there’s been a significant shift from offshoring to local production. This shift has simplified logistics and mitigated the risk of supply chain issues — two factors known to cause major shipping delays, profit loss and unhappy customers.
3. Increased pricing
Increases in construction materials, commodity pricing and capacity constraints have impacted rental rates, driving them higher than they have been in recent years. For example, our current Class A asking rate of $4.30 per square foot is more than a $0.45 increase compared to 2018. This has translated to new Class A industrial warehouses selling at an average price of $95 per square foot, a 30 percent increase over the average Class A sales price in 2020. We expect this average pricing to continue increasing through the end of 2021 and into 2022.
Several factors are driving this value appreciation, though a rise in construction costs and land constraints are the main accelerators.
4. Evolving retail
COVID-19 has also had a direct impact on logistics. E-commerce demand has grown significantly since the start of 2020, and the number of new entrants to the e-commerce sector rose by 21 percent year-over-year.
To combat growing demand, the e-commerce sector, including logistics, consumer products and parcel delivery, has been leasing facilities more than ever. In fact, those industries occupy 48.9 percent of Louisville industrial facilities — nearly half of the industrial market.
In the past, people have gone to shopping malls or grocery stores to buy what they need. COVID-19 has drastically changed the way we shop, and even older generations have embraced the Amazon effect, which has completely transformed the retail sector.
While the Louisville industrial market experienced significant growth in 2021, there are few signs of slowing down in 2022. Seventy-one percent of logistics experts expect e-commerce to continue driving demand, and several large-scale facilities, including Core5’s 1 million-square-foot Bourbon Logistics Center 3 and Hennepin Industrial’s two-building, 1.5 million-square-foot Derby Logistics Center, will help bolster supply.
Additionally, Ford recently announced that it is investing $5.8 billion to build two electric battery plants in Hardin County, Kentucky, which will create 5,000 jobs.
Though lack of land position for developments may pose a challenge in the future, the market will likely continue growing in 2022, based on the volume of occupiers seeking space in Louisville and the push for distribution in both e-commerce and inventory deliveries. Additionally, a strong market over the last five years and this recent growth have brought new and diverse developers and owners to Louisville, further accelerating Louisville’s industrial success.
— By Matt Hartlage, Managing Director, and Powell Spears, Managing Director of JLL. This article originally appeared in the September 2021 issue of Southeast Real Estate Business.