The Midwest can expect industrial growth
A new real estate forecast suggests the Midwest region is experiencing an industrial boom as e-commerce demands continue to grow.
JLL, a commercial real estate company with an office in Grand Rapids, recently released its 2022 Midwest Industrial Outlook report highlighting trends and forecasts for the Midwest market.
The report specifically focuses on modern bulk products with a focus on activity beginning in 2020 by top tenants, developers, and investors.
Details include such industrial real estate activity in Chicago, Cincinnati, Cleveland, Columbus, Des Moines, Detroit, Indianapolis, Kansas City, Louisville, Milwaukee, Minneapolis-St. Paul, Nashville, Pittsburgh and St. Louis, which together saw an average 8.9% increase in rents in 2021.
JLL uses a collection of buildings in these locations along with multiple data sources to monitor trends such as vacancy rates, rental prices, rental sales, and other statistics that contribute to the report’s forecasts.
“With the datasets we have, we’re able to pull the layers of what the numbers are really saying to create an article like this Midwest industry report,” said Harrison West, research director for JLL in the Michigan and report contributor.
As a key takeaway from the outlook, JLL forecasts a 16% increase in tenant demand for bulk product space from 2021, which reached 156.4 million square feet in the Midwest. The original forecast for 2021 was 129.3 million square feet.
E-commerce contributed the largest share of modern wholesale rental in 2020 and 2021, with Amazon accounting for 91% in the industrial sector. Tenant requirements in 2022 are expected to focus on e-commerce as more retailers turn to service offerings.
The report also projects a 12% increase in net absorption figures for 2022 and 107 million square feet of completions, a 34% year-over-year increase.
Overall, the Midwest is positioned to be a key region to meet these e-commerce demands. JLL previously projected that at least 275 million square feet of new industrial products would be needed in the Midwest by 2025.
However, the forecast has now been updated to 330 million square feet by 2025, a 20% increase from last year’s projection.
Why the Midwest Boom? JLL cites reasons such as prime market access with up to 50% of the US population within a day’s truck ride.
“With Amazon and companies like this looking for same-day delivery or 24-hour delivery, being able to be this close to such a population at a fraction of the cost is very attractive,” West said.
Additionally, JLL said the Midwest has robust infrastructure and strong connectivity to coastal ports with fewer barriers to development compared to coastal markets.
For Michigan, specifically, the report says Detroit experienced a major boom in 2021 with more than 5.8 million square feet of new inventory. This came after pandemic-related delays pushed back construction deadlines into 2020.
Pre-leasing activity in Detroit continues to strengthen in terms of speculative products with new inventory strongly boosted by automakers and national retailers. Specifically, major tenant expansions include Amazon, Ford Motor Company, FedEx, General Motors and Hollingsworth.
Detroit’s construction pipeline also remains robust with 6.3 million square feet currently under construction and additional projects expected to begin soon.
Although the pandemic has impacted the industrial sector with supply chain issues and labor shortages, the report highlighted that 2021 was a banner year for construction in the Midwest with new records. expected for 2022.
“Even before the pandemic, the trajectory of the industrial sector was clearly up, and then once the pandemic hit, it all kind of accelerated and really accelerated the growth of the sector,” West said.
Bob Horn, executive vice president of JLL, said productivity levels in the United States have contributed to this rapid expansion and development.
“We were fortunate to already have the technology in place to handle much of the self-contained type warehousing that we are experiencing through growth,” Horn said.
The result of this rapid growth is more and more speculative construction to come in 2022. According to the report, 89 million square feet of speculative product opened in 2021 with no committed tenants.
Speculative products accounted for 72% of completions in the Midwest region, and vacancy rates fell from 8.6% to 5.1% year over year despite this kind of increased activity.
Although demand is rampant, speculative groundbreaking work in 2022 is expected to be delayed due to construction delays.
“As rising material costs and labor costs slowed the development pipeline a bit, some developers scaled back their plans or filed plans,” West said.
This could lead to supply shortages by 2023 and 2024. Horn sees these shortages and shipping backlogs already set to have an impact during the holiday season this year.
“We’re getting a lot more inventory that’s been stored in the warehouse for a longer period of time,” Horn said. “Before the pandemic, we could get regular shipments from China, but they had to put the products on the shelves for a longer period of time. Instead of a shelf life of, say, 11 days, they had to reduce it to 30 days and part to 45 days.
His advice? “Do your Christmas shopping now.”
As demands increase and delays arise, Horn said he hopes states like Michigan put an aggressive plan in place to prepare for new industrial sites.
“When you have to convert farmland into an industrial site, there’s usually two years of preparation, and then you put another six to nine months into construction,” Horn said. “Michigan has been a little behind the trend, but the state has put a lot of concern and emphasis on it…and hopefully we’ll start to see results soon.”
West said Michigan has lost some automotive opportunities to other states, but he still sees the overall industrial boom as having a positive impact.
“I think that’s definitely a concern, but it’s also an opportunity for growth,” West said. “The trends we’re seeing in the region and across the country are certainly relevant to what we’re seeing in Grand Rapids and western Michigan.”
Looking ahead, Horn sees this regional growth having a positive impact as more developers and tenants invest in their communities.
“Rental rates have seen very healthy growth over the past three years,” Horn said. “You have tenants who will stay longer. They get 10 or 15 year leases. They stay put and engage with the community…hopefully that trend continues.