Delays in the supply chain affect almost every industry, as longer lead times and material shortages delay the delivery of goods, driving up costs and lengthening construction times.
The industrial sector is also unable to meet these challenges, with key materials such as steel and roofing materials having been behind for months, causing costs to rise. Because of these challenges, the process to develop a custom or bespoke bearing can take up to a year or more.
To help potential renters manage these pandemic pressures, developers are accelerating their pipeline for speculative developments that can support a variety of user needs. Speculative development is the practice of constructing a building without a lease obligation, in the belief that market demand will supply a tenant at the time of completion.
Develop speculatively to meet increasing demand
While speculative development among developers of industrial real estate is not a new practice, construction of these facilities has increased since the pandemic began. According to a 2019 Cushman and Wakefield According to the report, speculative industrial development accounted for 67 percent of warehouse and distribution center products under construction at the end of 2019. In 2021, that number will rise to 74 percent — a 7 percent increase since the pandemic began.
As prospective tenants seek future-proof supply chain operations through measures such as stockpiling additional inventory and improving redundancies, leasing speculative space is another smart tactic to help them meet supply chain challenges.
Speculative developments prioritize standardised, modern and functional designs that are versatile and move-in ready for a wide range of potential tenants. With industrial vacancy rates falling to 3.7 percent in 2021, speculative development at an all-time low is a strategic solution to meet rising demand.
Well-located facilities driving prime rents
As supply chain challenges become more important and rapidly evolving, more and more companies will be willing to pay a premium for well-located facilities. More than anything, companies are looking for facilities in key fulfillment centers that will increase productivity as e-commerce activity continues to grow, in addition to adding economic value to their bottom line — and they’ll pay top dollar for it.
according to a commercial edge According to the report, the national average for in-situ industrial rents in the top 30 US markets reached $6.45 per square foot in February, up 4.4 percent from a year earlier. The availability of speculative warehouses in constrained markets will earn higher rents for tenants who value strategic locations.
Where is industrial development headed?
While solutions to supply chain entanglements and backlogs continue to be explored, it is likely that we will face further challenges and slowdowns in the meantime, which will put additional strain on the industrial real estate sector. By providing a steady supply of new developments, developers can stay ahead of these challenges by providing quality facilities to tenants who do not have the operational bandwidth to wait for a project to transition from planning to delivery.
Industrial demand remains high in core markets such as Atlanta, Dallas and Houston. It’s also rising in the secondary markets, including cities like Savannah, Georgia, Charleston, SC, and Nashville, Tennessee, as more developers begin to expand their search for available land. Even though JLL reports that nearly 90 million square feet of industrial products were shipped in the fourth quarter of 2021, the market remains tight, underscoring the need for more speculative development.
In order to keep the momentum in the industrial market despite the challenges in the supply chain, speculative development offers a flexible solution to counteract these difficulties. The speculative development strategy offers a mutually beneficial opportunity to meet the growing demand for industrial space. With the combination of record demand, rental growth and investment activity, the industrial sector is poised to continue growing and prospering for the remainder of this year and into 2023.
David Welch is President and CEO of Robinson Weeks Partners. He is responsible for the overall operations and growth of the company, including the implementation and oversight of its developments, acquisitions and divestitures. He maintains important relationships with investors and capital partners. He leads efforts to structure joint ventures through public and private partnerships and oversees the company’s largest development project, the Gillem Logistic Center, a 1,168-acre master plan development in the greater Atlanta area.