The COVID-19 pandemic made 2021 a historic year for the shipping and logistics industry, as rising e-commerce sent large retailers and general merchandisers scrambling for warehouse space to hold their inventory, supply-chain issues delayed shipments, real estate developers strained to keep up with demand, and local governments struggled to issue permits quickly with employees working from home.

During a panel titled “There’s a Traffic Jam in the Shipping Lane: Supply Chain and Logistics Issues and the Path Forward” at the ULI Fall Meeting in Dallas, moderator Erik Foster, principal and head of industrial capital markets for Avison Young, asked experts in the supply chain and logistics industry to talk about how the sector has fared since the pandemic struck and what the possibilities are for the coming year.

“The market is still very, very strong for industrial leasing” said Carl Quesinberry, senior director of consulting services for Avison Young. “Absorption is outpacing development. The rental rates are continuing to increase at an exponential rate.”

The ratio of space under construction to total inventory has reached historical highs, up 20 basis points since the second quarter of this year. “It is unprecedented that the amount of construction can continue to grow at the rate that it has, and we see some slackening of that market,” he said. “For tenants who have to renew leases, rent increases are getting to unprecedented levels, too—300 percent, sometimes 400 percent higher. The sales volume is at the level that it was last year, but this fourth quarter is going to be interesting: those dynamics have shifted.”

Delivery and Possible Oversupply

Gray Bouchillon, global head of the industrial sector for Nuveen, agreed that things are changing. “Nothing’s going to compare to 2021,” he said. “We’re starting to see a more regular pace of delivery coming through. People are back at the municipalities and ready to come out and perform inspections. Utility providers are out on the site on time again.” However, he predicts the record-low vacancy rates are not likely to abate until mid-2023.

Some markets may even experience oversupply by this time next year because of the amount of warehouse space on track to be delivered in the second half of 2023, said Troy Adams, vice president of real estate for NFI. “But in the coastal markets, rents will still be strong,” he noted. “This is still where institutional capital wants to be.”

The Need for Diversification

The pandemic has also highlighted the importance of geographic diversification. When COVID hit, “a lot of product that would have come through the ports of Los Angeles and Long Beach, California, was sent east,” Adams said.

High population growth in the Southeast has been a boon for Savannah, Georgia’s port, in particular. “Everyone’s diversified away from California. We haven’t had a backlog in Los Angeles and Long Beach for the last two months,” Adams said. The backlog has shifted to southeastern ports and up the East Coast, although those markets are tough to build in, in part because land is scarce, he added.

Bouchillon believes urban infill sites are good prospects. “We’re looking to get closer to population centers,” he said. “We’re looking for more flexible assets that are multitenant and can respond to a diverse array of users. All we needed was an onslaught of demand to prove the potential for rent growth in light industrial facilities, and finally Amazon, Home Depot, Lowe’s—they’re all looking for 150,000- to 300,000-square-foot [14,000 to 28,000 sq m] facilities closer to rooftops. The best part of that demand is it’s mostly investment grade.