Demand for industrial space from fast-growing sectors is driving a boom in spec building as real estate developers and construction firms seize the moment.
Boyden's perspectives on the news and trends that are transforming industries
Sprawling warehouses with loading docks, parking lots and proximity to interstate highways make ideal logistics hubs. The need for industrial spaces fitting this description, and the scarcity of vacancies, is giving real estate developers the confidence to build them without guaranteed tenants. And they’re doing so quickly. For example, just 18 months after NorthPoint Development, one of the nation’s biggest players in spec development, proposed the 1.8 million-square foot West Chester Trade Center outside Cincinnati, tenants such as General Electric were moving in.
The trend is being fueled by rapid expansion, particularly in ecommerce. Companies that are growing fast have little time for the longer process of building to suit. Nor do they necessarily have the expertise. Meanwhile supply chain volatility is adding extra pressure. Developers, both in large markets and small towns, are being proactive and building quickly, since waiting can drive up costs, said Gary Roden, Vice President of Design-Build Business Development at TDIndustries, a Dallas-based construction firm.
Speculative construction is inherently risky, as economic headwinds can keep new buildings empty. But current conditions are favorable: Industrial space vacancy is less than 5% nationally, demand is ravenous, and “it doesn’t feel like that party will end anytime soon,” said Andrew Hunt of the Center for Real Estate at Marquette University. He describes the market environment as one in which “there is a race to get goods to people faster and to manufacture more things.”
Growth in ecommerce as well as a wave of manufacturers reshoring operations during the pandemic suggest ongoing demand. But there are other risks, including inflation and rising construction and labor costs. By Hunt’s estimate, it costs real estate developers 40% more to construct a spec warehouse this year than last year. Yet some analysts maintain that inflation and supply chain issues are “contributing to the spec building boom rather than hindering it,” the New York Times reports.
Spec buildings tend to be flexible, with most having about 5% of space set aside for offices, said Hunt, though this varies by market. Texas illustrates the point with its large array of markets and influx of businesses. Up to 10% of a spec building in Austin might be office space. Less so in San Antonio. “Uses of spec buildings in San Antonio are more distribution based,” said Joe Iannacone, a Senior Vice President at Titan Development. Despite recession worries, Iannacone is bullish about the Southwest market. “All of these suppliers need space, and there isn’t the space right now,” he said.
Brent Miles, Chief Marketing Officer at NorthPoint Development is equally optimistic. Seventy-five percent of his firm’s leasing is in speculative development, and it is currently at work on a 40 million-square foot project in Joliet, Illinois. Miles believes the market will support the development. “There is a tremendous amount of demand, and I don’t see it ending,” he said, adding that most developers base their decisions on location, infrastructure, and the availability of human capital.
Apart from warehouses destined to become logistics hubs, more specialized spec building are springing up as well. Most are being built to meet growing demand from the biomedical sector. “The need for lab space far exceeds the current supply,” said Scott Cooper, a Division Manager at Brasfield & Gorrie, one of the biggest privately held construction firms in the U.S. “This has led many of our clients to develop lab buildings on spec to give their tenants a jumpstart in their race to be first to market.”