Jack Rosenberg Rosenberg: “Our numbers show that this is the golden age of real estate development; there’s more space being built at a faster pace than ever before, and the expansion of industrial inventory astounding.”

CHICAGO —The need for logistics is strong in major markets across the country and will continue to be, with some secondary markets emerging to help satisfy users’ voracious appetites, Colliers International’s Jack Rosenberg, national director, logistics and transportation, and James Breeze, national director, industrial research, tell GlobeSt.com. The firm recently released a white paper titled “Supply-Chain Modernization Creating Robust Demand for Big Boxes at Mid-Year,” which showed that while 2015 was one of the strongest years to date for the industrial real estate sector in North America, with the big-box market leading in construction and transaction activity, 2016’s activity to date is “astounding.”

The paper went on to say that industrial big-box real estate throughout North America is thriving because of supply-chain modernization to meet the needs of the fastest-growing demand driver in North America: e-commerce. With lower vacancies, higher effective rents and strong absorption, demand is expected to continue to outpace supply in core markets for the remainder of 2016. Key markets highlighted by the paper include Atlanta; Chicago; Dallas-Fort Worth; Greater Los Angeles; New Jersey/Lehigh Valley, PA; and Toronto.

“The increase in demand for modern big-box space because of the need to modernize the supply chain will continue to create demand for supply-chain markets,” says Breeze. “We expect demand for modern big-box space to continue as long as consumer spending and e-commerce continue to grow as they have been.”

Rosenberg says logistics demand has been strong in major markets, where there’s always been a wave of activity. “I don’t see people developing in less-dense markets because the cost of transportation will outweigh any benefits they get if they’re not near an urban area. I also see municipalities that issue permits for this development seeming to go in waves. For example, certainly in the Chicago area, where I’m based, it was very difficult to get approvals between 2003 and 2007, and things improved after the financial crisis, but now that the economy is growing, government approvals are harder and harder to get.”

In addition to the five major distribution markets that typically come to mind for North America—Atlanta, Dallas, New Jersey/Lehigh Valley, PA, Chicago and Southern California—is Toronto, the third largest metro area on the continent, says Rosenberg. All of these markets have low vacancy and high demand. “Our numbers show that this is the golden age of real estate development; there’s more space being built at a faster pace than ever before, and the expansion of industrial inventory is astounding.”

Breeze agrees, adding that development in core markets is spread pretty evenly, with no one market more heavily concentrated than any of the others. “They’re all at record levels; even under-construction product, while it dipped slightly, is still near all-time highs.”

James Breeze Breeze: “I think companies will start looking at markets near inland ports or seaports; those in the secondary markets need to be around them.”

The other side of the equation for industrial real estate development, of course, is capital, and this is readily available, says Rosenberg. “With global interest rates being at record lows, there’s even more demand for industrial real estate capital. That’s why it’s the golden age—there’s tremendous demand by occupiers and capital is available, so developers are doing as much as possible all over the country.”

Some secondary markets are also strong, Rosenberg says, including Memphis; Indianapolis; Savannah, GA, near the Port of Georgia; and Denver. “I think of the secondary markets, Indianapolis and Chicago tend to be the choice for really big distribution centers.”

Considering secondary markets in which to build big-box space, Rosenberg says the Lehigh Valley is interesting, since there’s not a lot of flat ground there. “As people look for flat ground for industrial building development, they’re moving farther west to Harrisburg in Central Pennsylvania. But we will see more growth in Chicago; there are 1,000 acres within Lehigh Valley that are tied up with owners who don’t want to sell, but Chicago is flat as far as you can see. There are no barriers to increasing land for industrial development.”

Breeze says development will stay in core markets for the foreseeable future. “Dallas still has quite a bit of land to develop, but I also think companies will start looking at markets near inland ports or seaports; those in the secondary markets need to be around them.”

In the grand scheme of distribution expenses, real estate is low, so trying to save money there doesn’t really impact companies’ bottom lines, Rosenberg says. “As real estate people, we like to think we’re important, but real estate seems to be about 5% of the cost of operating a distribution center. Transportation and labor make up the other 95%, with access to labor becoming more important as labor becomes tight. Availability of labor is the number two on distribution users’ list of criteria, along with transportation, truck-driver and fuel costs. They may find great cheap buildings in the middle of the state, but any savings in real estate will be outweighed by transportation costs.”