Special report: The race for industrial space is accelerating across the Triangle

Editor’s Note: Last month, WRAL TechWire launched a new series, the “Future of Work.” The Future of Work series is supported by commercial real estate firm JLL and other partners.

The first report is here, and the second story is here. At the end of April, the series explored the relationship between work spaces, work places, and the current labor market.

Last week, the Future of Work series took an in-depth look at the demand for land, which has increased in the Triangle and can now be described as “insatiable,” while developers look to shore up their land positions.

The series continues this week and includes a LinkedIn Live broadcast on Tuesday, May 10, at 11 a.m.

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RALEIGH – The onset of the global COVID-19 pandemic rapidly accelerated demand and drove greater customer adoption in e-commerce, leading to an accelerated demand for home delivery and logistics services.

Immediately following the onset of the pandemic, e-commerce spending increased by nearly one-third, comparing the second quarter of 2020 with the first quarter of 2020.

What changed? Most of the country was spending time at home, and limiting trips to retailers, including grocery stores.

“In 2020 the pandemic shattered old consumer shopping habits, accelerating online shopping,” a JLL report on the industrial market reads. “This ultimately sent shock waves down the supply chain system and contributed to an increase in warehouse demand as tenants grappled with ways to prevent a future shortage of inventory.”

Exclusive Q&A: Resiliency, e-commerce keeping demand for industrial space high

Resiliency and e-commerce

Those trends continued through 2020 and 2021. Even though the spike in adoption observed in the second quarter of 2020 did not continue to skyrocket, e-commerce continues to grow. According to the data from the U.S. Census Bureau, e-commerce spending increased 9.4 percent in the fourth quarter of 2021 compared to the fourth quarter of 2020. According the the report, e-commerce sales in the fourth quarter of 2021 accounted for 14.5 percent of total retail sales.

In a report compiled by JLL that tracked the areas of the industrial sector of the commercial real estate market, the firm found that across the United States, logistics and parcel delivery ranked first when it came to demand.

Nearly 20 percent of all demand in the sector came from this segment of the market, the report found. That’s as new entrants to the e-commerce segment of the market have increased demand by 21 percent.

“The logistics market has been remarkably resilient through the pandemic with the increase in e-commerce as a significant contributor,” said Mehtab Randhawa, senior director, industrial research at JLL, and an author of a recent report, Race for Industrial Space. “COVID-19 pushed online adoption rates substantially higher than expected, driving continued leasing demand in 2020 and going into 2021 and 2022.”

But that has led to a “supply crunch,” Randhawa notes in the report.

“As a result, the gap between the amount of space being delivered to lease and the volume of tenant demand grew, resulting in a supply deficit,” the report reads. “While deliveries are rebounding from the onset of the pandemic, supply growth is unable to keep pace.”

Future of Work special report: Across the Triangle, an ‘insatiable demand’ for land

Beyond the gateway markets

Here’s what’s happening, said Randhawa. “Logistics and distribution companies and third-party logistics providers are pressed to move record volumes of goods while maintaining competitive delivery times,” she said. That pressure has resulted in these providers taking aggressive steps to lease property, such that they’re able to “increase their networks’ capacity and efficiency,” said Randhawa.

The result? Together, these industries accounted for nearly a quarter of total leasing volume in 2021. While demand was high in gateway port markets, said Randhawa, secondary and tertiary markets also saw record year-over-year growth in leasing and investment activity in the industrial segment of the market.

That’s true in the Carolinas, as well, said Randhawa.

North Carolina continues to attract investments from companies seeking to expand e-commerce operations, including the construction of fulfillment centers, such as the recently announced Macy’s fulfillment center in Rowan County, Kroger’s fulfillment center in Cabarrus County, and Amazon’s expansions across the state including in Fayetteville, Johnston County, and Wake County.

Macy’s to invest $584M, will hire nearly 2,800 workers for new Rowan County fulfillment center

Flocking to North Carolina

It’s not just people that are moving to North Carolina, though they are.

Companies are moving, too.

There’s already intense competition in existing gateway markets as demand has grown in the logistics and third-party service provider segments, backed by the increase in e-commerce activity and consumer behavior.

But because of that competition, tenants and investors are “flocking to markets like the Triangle for investment or relocation opportunities,” said Randhawa.

“We’ve also seen an increase in domestic migration patterns in the Carolinas,” said Randhawa. “This will immensely help the logistics sector, as companies will move close to where people live.”

Take FedEx Ground’s recent decisions to open two facilities in the greater Triangle region, one in Wilson, and one in New Hill.

In both announcements, a statement from FedEx noted the company selected the site location due to “ease of access to major highways, proximity to customers’ distribution centers and a strong local community workforce for recruiting employees.”

Like kudzu, Amazon rapidly growing its presence across North Carolina

Triangle demand high, vacancy low

JLL’s research on the industrial market in the Triangle shows that while there is nearly 85 million square feet of existing inventory, vacancy is at 1.7 percent.

That’s incredibly low, said Al Williams, senior vice president, industrial, at JLL.

And even though there were facilities with more than 5.7 million square feet under construction as of the end of 2021, Williams noted that nearly half of that space is already preleased, meaning that once completed, it won’t be available.

“The most important part of the real estate process today is getting the space that fits your need, and when you need it,” said Williams. “Many occupiers are increasing the amount of product required in active storage to prevent disruptions in their inventory via supply chain, thus dynamically altering their footprint needs.”

Right now, demand for industrial space is “drastically outpacing today’s supply,” said Williams. “The pre-leasing statistics are representative of that.”

What’s next

And companies that are seeking space often find that they’re jockeying for position.

“We’re in a market that used to advise users to start the real estate process 6-12 months before their lease expiration, now it’s closer to 12-14 months,” said Williams.

Now, there are many more “moving pieces to the industrial real estate landscape,” Williams noted. Now, it is harder to marry a lease commencement to an expiration, due to landlord delivery, for instance. And, said Williams, there are two to four other groups that may be vying for the same facility, which could prevent a company from negotiating flexibility on when a first rent payment is due.

“Powerful demand observed in 2020 and 2021 is expected to continue into 2022,” said Randhawa. “Rents are expected to rise as demand outpaces supply with increasing land values and inflated construction costs being allocated to end users.”

This editorial package was produced with funding support from JLL and other partners. WRAL TechWire retains full editorial control of all content.