While the office and retail sectors struggle, industrial real estate is flourishing. Much like the previous quarter, demand is exceeding supply. As Americans spend a substantial amount of time at home, the supply chain and delivery systems are needed at record numbers due to the booming e-commerce industry. In addition to distribution, the technology and pharmaceuticals industries are driving demand for adaptive, class A tech-flex space.
The historically sought-after urban core, which produces and houses a large amount of talent around the universities, is being overlooked in favor of the spacious suburbs. The appeal of stand-alone buildings, access to major highways and abundant parking has made outlying submarkets a popular destination. A prime example of this trend is SunCap’s construction of a 278,212 square foot (“SF”) facility in Westport Woods in the Parkway West submarket. This last-mile distribution center is one of several currently approved for development in the region. Hillwood Development disclosed plans to redevelop the former George Westinghouse Research Park along the Parkway East. The plan is to
convert the property into an 800,000 SF, two-story e-commerce distribution center. Innovative technology manufacturer, Wabtec, will occupy 11,000 SF of space in the Neighborhood 91 project at the Pittsburgh International Airport Innovation Campus. Access to nearby transportation hubs and major arteries are primary reasons for these decisions.
The growing and robust biomed industry is having a considerable impact on the region’s industrial real estate. Hemp Synergistics will be expanding its space in Leetsdale to 52,000 SF. This is more than double its current space and will be used as a manufacturing and R&D center. They will also have the option to expand to 100,000 SF as demand dictates. The aforementioned developer, SunCap, has been active by constructing a 220,000 SF distribution center in Saxonburg, Butler County for pharmaceuticals manufacturer, Bayer. This will not only replace, but also double the size of their current facility in New Galilee, Beaver County. The deal will include the right to expand by an additional 80,000 SF.
Cold storage or temperature-controlled warehouses will become a highly sought-after product with the development of COVID-19 vaccines, which are required to be kept at extreme temperatures, ranging from minus-20 degrees to minus-70 degrees Celsius depending on the vaccine. However, the more demanding issue is the emerging popularity of residential food delivery. Much like other retail industries, grocers are not immune to the effects of the pandemic. As Americans shelter in place, fewer are willing to venture to the supermarket, causing food storage demand to greatly surpasses that of pharmaceuticals. The cost to construct this type of property can be nearly twice as much as a typical warehouse facility. With the immediate demand for the COVID-19 vaccine and a growing reliance on home food delivery, more developers are being pushed to bring cold storage facilities to market.
Both locally and nationally, the e-commerce giant, Amazon, is dictating much of the distribution market. The largest industrial project to be completed in the region in recent years is Amazon’s 1,300,000 SF distribution center at 1200 Westport Road in the Parkway West submarket. In the Lawrenceville section of the Greater Downtown submarket, Amazon will lease the former Sears Outlet building. The property will be transitioned into a 330,000 SF last-mile distribution center. This section of the city has recently been dubbed “Robotics Row” due to its prolific technology centric tenants. Many other large warehousing and distribution centers in the region are rumored to have possible ties to Amazon.
Nationally, there was reason for optimism entering the fourth quarter. As of the end of the third quarter, industrial inventory increased 2.4% and net absorption increased by 3.3% in the top 25 markets year-over-year. The recent rise in new product, particularly distribution space, has caused overall asking rents to increase 2.6% from July to October. The national average was $7.21 per SF. This is a 5.6% year-over-year change. In December, the national economy declined by 140,000 jobs. This breaks a seven-month trend dating back to April. The unemployment rate at the end of 2020 was 6.7%. While most job losses were in hospitality, education and government, the industrial sector increased. Construction lead the way with a net increase of 51,000 jobs, followed by transportation and warehousing at 47,000 jobs, and manufacturing at 38,000. The recent surge in COVID-19 cases contributed to the national personal income rate declining by 1.1% at the end of November. According to the Institute for Supply Chain Management’s Production Manufacturing Index (PMI), manufacturing increased by approximately 3% in December. This was the largest single month increase of 2020. Of the 18 manufacturing industries, all but two (printing and nonmetallic mineral products) posted growth in this same period.
As we enter 2021, numerous factors will weigh into the success of industrial space. The global supply chain could see mild distress as we come out of the 2020 holiday season; a time when the distribution system is challenged to keep up with demand. However, this high demand for space is consistent and expected to continue, thus driving up the price of space which will be at a premium. Vacancy rates should remain steady as developers struggle to decrease the margin between supply and demand. Currently, two vaccines have been approved for distribution by the CDC with a third in the process. It is certain these vaccines will positively impact the economy by driving citizens to patronize retailers and ultimately provide an influx of cash to the economy. Lastly, and quite significantly, two major unknowns are the impact of a new presidential administration and political tensions.