By Jack Stubbs
Russia’s full-scale invasion of Ukraine earlier this year has caused an unspeakably tragic loss of life for thousands and continues to send immense shockwaves throughout many of the world’s economies and real estate markets. Accordingly, firms throughout the industry continue to monitor the evolving situation closely, with an eye on what the longer-term implications might be.
New York-based Newmark, a global commercial real estate advisory and services firm, recently released “Geopolitical Turmoil in Early 2022”, a report that explored the potential implications of this geopolitical instability for the United States’ industrial markets.
Among other topics, the report analyzed inflation rates and implications for consumer spending patterns and their subsequent effect on industrial demand; global supply chains, and the subsequent impacts on development strategies, construction costs and shortages of building materials; energy and fuel shortages, which impact industrial occupiers’ transportation and logistics costs; and potential knock-on for the industry and employment sectors, with various industrial sectors — paving, mining, manufacturing and agriculture – particularly impacted.
In order to further investigate some of the findings of the report, we spoke with Newmark Executive Managing Directors Kyle Roberts, Steve Kapp and Adam Petrillo about the current state of the U.S. industrial market, market-specific impacts for certain regions’ markets, and how the trajectory of construction and energy costs might impact the nation’s industrial sectors in the coming quarters.
What were some of the main findings from the report? What do they suggest about the current state of the U.S. industrial market?
Kyle Roberts: The industrial commercial real estate market is highly globally interconnected, so any global disruptions can have domestic ripple effects in the U.S. Across the industrial sector, there are product types that could be impacted, negatively or positively, from a shift in global security concerns and supply chain disruption. However, overall, geopolitical uncertainty can result in headwinds that need to be thoughtfully considered across the spectrum of market stakeholders.
Nationally – and regionally – how might inflation impact demand for industrial space? How do you foresee the above trends influencing this real estate sector in 2022 and beyond?
Kyle Roberts: Domestic consumption dynamics (household and business) will be the core driver impacting demand for industrial real estate, and lease rate movement will most likely be geographic-, sector- and product type-based, rather than systemic. The relationship between supply and demand experienced in the past 24 months is likely to change in the coming 24 months — though, likely a slower, more gradual change.
Can you provide any regionally-specific insights about the impact of this ongoing geopolitical uncertainty on industrial markets (e.g. Pacific Northwest/Seattle, San Francisco Bay Area)?
Steve Kapp: We are seeing very strong demand for warehouse space right now in the San Francisco East Bay industrial markets. The geopolitical uncertainty is another element of global supply chain uncertainty that — in combination with the pandemic — has led manufacturers and suppliers to increase their U.S. warehousing footprints for parts, supplies, sub-assemblies, etc.
One reason for the strong demand for San Francisco East Bay warehouses is that they are being leased by both traditional warehousers of consumer goods as well as many users in new economic sectors — for example, life science users (Lonza Pharmaceuticals, Allogene, Eikon); automotive assemblers (Rivian Motors, Tesla); food-tech (Impossible Foods) and advanced manufacturers (Third Wave Automation).
The surge in demand from multiple sectors has caused rental rates to grow significantly over the last two years with no sign of slowing; rates have increased by as much as 15-20 percent since the beginning of 2022.
What do you foresee for the increase/decrease of construction costs? How might this trajectory impact the industrial market moving forward, both at the national and regional level?
Kyle Roberts: Continued supply chain challenges and subsequent increased costs for construction materials will constrain inventory growth, hampering timely deliveries. This means that pent-up demand may persist beyond 2022, as markets may not be able to deliver enough supply to meet demand based on a sheer lack of construction materials (concrete and structural steel, etc.).
How might the increases in energy cost impact the industrial real estate market – particularly when it comes to considerations around transportation/logistics?
Adam Petrillo: A sustained increase in fuel pricing has direct implications for industrial demand given that transportation costs are a core driver of site selection for many occupiers. There will likely be even greater demand for core locations that limit transportation costs. A heightened focus on energy and its cost — both to the environment and to the bottom line — will also drive adoption of electrified fleets for line haul (full truckload), less than truckload (LTL) and localized delivery.
Are you optimistic about the U.S. industrial market to recover from this ongoing period of instability?
Adam Petrillo: This ongoing period of instability stands to ultimately strengthen the U.S. industrial market through bolstering domestic production and attendant domestic supply chain build-out. U.S. consumer demand is likely to remain strong in the long-term, and there has been a structural shift, in mindset and in practice, from the last half-century of globalization. U.S. corporations may increasingly turn to a “make where you sell” approach or expand partnerships with aligned nations in the Americas.