Trends in industrial leases to consider in 2022
Many believe it was only a matter of time before the industrial sector got to where it is today, and COVID-19 has surely accelerated the evolution and transformation of the real estate industry. industrial. The continued growth of e-commerce, a focus on mitigating supply chain impact, and institutional investments driving a new wave of growth are trends that have emerged in our “post-COVID” world.
Continued impact of e-commerce
In 2021, e-commerce accounted for just over 19% of all retail sales. The year-over-year growth rate of e-commerce sales has moved from an extreme jump of around 30% during the pandemic to leveling off in 2021, returning to pre-pandemic levels of around 14 % year over year. E-commerce in 2021 has grown into an $870 billion industry. In 2021, e-commerce accounted for nearly 25% of all holiday spending, down from pandemic levels but signaling a consumer preference to avoid long lines and crowded traditional holiday shopping methods. .
The continued growth of e-commerce has had substantial effects on industrial leasing. Notably, Amazon accounts for over 40% of US e-commerce. In 2021, Amazon acquired 75% more land for distribution, data and other facilities, increasing its industrial portfolio to over $35 million. This increase in acquisitions, although it has been associated with an increase in rentals year over year, is a stark reminder to landlords that tenants are not guaranteed. This change doesn’t raise a ton of immediate concern given that it’s become common for around 70% of new build in the industrial sector to be pre-let, but landlords should be aware of a potential change in psychology lease versus ownership for large manufacturers. users.
Some developers, distributors and wholesalers are looking for adaptive reuse for industrial properties to meet growing market needs. The focus on last mile delivery required creative solutions from landlords and tenants. Adaptive reuse projects involving sites that have been vacant for years can be great opportunities for a last-mile installation, but environmental contamination, zoning, and title issues must be considered. Landlords and tenants should understand past use and potential environmental risks of adaptive reuse of a property with above or below ground gas storage tanks, solvent spills and other concerns that could affect product storage or use of the site.
Lighten the COVID supply chain
Delays in unloading shipping containers, delays in delivery caused by fewer truckers or stevedores are examples of the many factors having a substantial impact on supply chain complications which, in turn, have diminished the economic growth during and during the COVID-19 pandemic. The difficulties affected all vertical parts of the supply chain, including unavailability of raw materials and labor shortages in manufacturing, increased shipping costs (500% from China to United States from 2020 to 2021), the increase in demand, with a corresponding lack of industrial storage space. . The United States began to attack the supply chain broken by port expansion, such as Georgia’s $500 million investment in the Port of Savannah and the infrastructure bill passed, but in waiting for funding.
Despite the success of the Port of Savannah and others in absorbing increased supply needs, Western ports currently face a backlog of ships waiting to be unloaded. With the lack of truck drivers to transport cargo from port to consumer or distribution facility, ports must invest in additional container storage facilities both on or near port property to other along major highways and railroads to reduce this backlog. Industrial outdoor storage leasing has exploded as a result and is poised to be one of the biggest growth areas in the industrial real estate sector for 2022.
Additionally, supply chain challenges facing the United States have hampered the effectiveness of industrial leasing. Take lumber for example, a product that has seen such shortages during the pandemic and weather-related supply chain issues that have grown businesses (not just the product itself) by 40% or more. Rising costs and the inability to obtain timber, no matter how deep in their pockets, have delayed the construction of not only new developments, but also leasehold improvements and other construction needed for the landlord begins to charge the tenant’s rent.
The risk is great. A landlord, faced with a significant delay on a construction, may be in default of a lease, allowing a tenant to walk away after having already spent a lot of time and money. Landlords should look to the future and consider contractual protections similar to force majeure provisions for supply chain disruptions, giving the landlord more time to complete a build or forcing the tenant to start paying rent after a percent complete following a supply chain disruption trigger event like the Suez lockdown.
Institutional investment, driving a new wave of growth
The above phenomena have made one thing clear. Investors are toying with the idea of shifting their portfolios from a multi-family sector to a more diversified or industrial-dominated sector. This change will likely take years, as multifamily remains an extremely profitable and attractive investment given rising rents across the country.
In 2021 alone, Investcorp acquired 64 industrial properties, over 5,600,000 square feet of space for approximately $640 million. The properties enjoyed geographic diversity and were 95% leased. In 2021, JP Morgan formed a $700 million joint venture with Zenith IOS to acquire and lease industrial outdoor storage properties. The company is uniquely equipped to target infill industrial sites in growth areas to meet current and future supply chain needs. Some may think that these are not indicators of the future but one-off transactions, we consider them the tip of the iceberg.
Institutional investment leads to exponential growth for some and death for many. Small businesses and local owners need experienced lawyers who understand the market and can step in. The local attorney is equally important in these important transactions to understand the intricacies of zoning, title, and other issues that might be handled differently in the state where the institutional investor’s attorney is located.
Stephanie Friese is joint managing shareholder of the Atlanta office and president of Chamberlain Hrdlicka’s Real Estate Practice Group. She can be reached at (404) 665-1220 or [email protected] Will Janousek is a real estate and corporate law assistant in the Atlanta office of Chamberlain Hrdlicka. He can be reached at (404) 658-5444 or [email protected]