Too Much Industrial?
A curious article crossed my desk the other day, forcing the inner contrarian in me to pay attention. The Globe St article written by Joseph Ori discussed the possibility of an industrial bubble forming. While the world has certainly changed from the pandemic, the first stat he presents, forced me to ask, “has it really changed as much as we think?” Ori details an eye-popping stat that “over 660 million new SF of industrial space is coming to market in 2022.” In a normal year, this number is closer to 100 million SF, which means we’re about to see 6x the normal amount of new supply by year’s end.. The 2022 number represents a staggering 4% of the nation’s entire industrial inventory of 16 billion SF.
For context, U.S. e-commerce sales (the main driver of recent industrial growth) has jumped from $500 billion in 2018 to nearly $900 billion in 2021. In addition, supply chain disruptions caused by the pandemic, the new trend of de-globalization / re-shoring and various global events like border tightenings and the Ukraine war have placed added importance on “just in time” inventory and last-mile facilities. Demand factors have fueled explosive YOY rent growth, nationally at 16% as of Q1 2022. In markets like Boise and Orange County, rents are up on average 20% in the past year. Developers chasing such trends while fending off sky-high construction costs might believe these high rents can climb forever. On the contrary, businesses will eventually reach their limits on cost absorption and eventually seek alternative options for their storage needs. While it’s impossible to outline the full assortment of supply and demand effects of the past few years, it’s now easy to see Ori’s point that 2022 industrial construction at 6x normal levels does appear excessive. Overlaid with a possible slowing economy and the problem comes into real focus.
The real culprit in my eyes is cheap money. The Fed’s accommodating policy has never made development easier from an ROI perspective. Without a doubt, some of the $5 trillion of the Fed’s balance sheet expansion in the last 2 years has made it’s way into commercial real estate development. With retail, office and hotel development largely off the table, industrial and multifamily have been the darlings, soaking up capital eager to be deployed into scarce high-growth commercial real estate opportunities during the pandemic.
The craziest part of the COVID episode thus far has been the eye-popping rate of change. The stock market plummeted in March ‘20, only to rebound a few months later. Same with Zoom, Peloton, Shopify and other highflying pandemic stocks. Look at their pricing today and you will see a notable upside-down v-shaped chart over the last 2 years. Same with oil, used car prices, inflation, and now airline ticket prices. Chart movements have been a roller coaster to say the least.
Now we see capital markets in turmoil as the Fed act swiftly on rate hikes to combat inflation. This creates the real possibility of new warehouse supply becoming a victim of higher borrowing costs and businesses preparing for a potential recession, causing the industrial market rents and valuations to move downward just as quickly as it shot upwards in the first place.