With demand growing rapidly for distribution centers and available space tightening up, more developers are building new facilities on speculation or “spec,” meaning without a tenant or buyer lined up as they’re confident it won’t stay on the market long.
This is continuing a trend that started a couple years ago, driven primary by rapid growth in ecommerce as well as the increasing trend toward same-day delivery services. As Multichannel Merchant tracks distribution center and fulfillment center activity, more spec developments have been popping up, like this 769,500-square-foot project in the St. Louis area.
When the recession hit in 2008 and even through 2011, “spec was a dirty word,” said Mike Lowe, first vice president at CB Richard Ellis.
“There was negative (space) absorption, with landlords and tenants giving back more than leasing,” Lowe said. “Financing was very hard, and it was all doom and gloom, so supply was increasing greatly.”
Then in 2013, things started to turn as absorption rates of new space coming online increased. “Developers who had been sitting on vacant space for 2-3 years, now wanted to get deals done to get occupancy,” he said.
Douglas Armbruster, senior vice president and regional director for warehouse, distribution and manufacturing developer IDI Gazeley, said ecommerce has been the main driver behind the resurgence in spec DCs. He added that projects initially funded and scoped three years ago are coming to market now and moving quickly.
“We’ve seen spec pick up since about mid-2012 in all markets across the country,” Armbruster said. “It’s been heavier in more densely populated areas where we’re seeing buildings constructed for same-day delivery in urban markets.”
According to an ecommerce report from CBRE, light industrial properties — typically smaller than 200,000 square feet and often located in or near urban markets — have been identified as key assets for the last-mile issue and same-day delivery.
Armbruster said he has seen ecommerce companies employ zone skipping tactics with their new distribution centers to squeeze out supply chain costs in the last mile. “They’ll use their own facility to basically provide large volumes of product directly to population centers,” he said. “For example, an ecommerce company can have doors assigned to particular municipalities like Houston or Jacksonville, sorting packages themselves instead of trucking them to UPS or FedEx to sort.”
With demand high and supply low, Lowe said, DC lease rates are up and landlords and developers “are back in the driver’s seat,” with newer spec properties coming online around the country.
“Vacancies in most major markets where industrial property is a factor are at levels not seen in the past 15-20 years,” he said. “For example Cincinnati has a bulk vacancy rate of about 4%, in the 14th largest commercial market in North America. What that means is it’s typically around a 10-15% vacancy rate. When it gets into that range, people start adding supply to the market.”
Indianapolis and Dallas are two markets that are exceptions, where vacancy rates are a bit higher as space has been overbuilt, but that situation could change quickly, Armbruster said. “In most other (major markets) demand is outstripping supply,” he said. “In northern New Jersey, everyone is trying to get into the same-day market in New York City, so the challenge is to buy up any available land to tear down existing assets and put up more modern facilities.”