Big-Box Demand Shifts Eastward

SAN DIEGO-Big-box space requirements, both on a square-footage basis and on a number-of-requests basis, are growing throughout the country, and e-commerce remains a heavy and growing demand driver for that space, Jones Lang LaSalle reports exclusively to GlobeSt.com as the firm prepares to gather more big-box research during the NAIOP Development '13 conference here this week. While overall demand is up, demand in the most active big-box market, the Inland Empire—which accounts for 18% of the nation's speculative construction—is flat, and JLL's research points to the push for this type of space shifting eastward.

In the Northeast, demand for big-box space is growing, outpacing the Midwest, and concentrated in the larger, mid-size warehouse segment, producing anecdotal evidence that small- to mid-market firms are getting back into the leasing market, JLL reports. It is also very active in larger segments, since space needs in excess of 1 million square feet are heavily concentrated in the region.

Five of the top six industries prefer their big-box space to be located in the Northeast. These include food and beverage, retailer (e-commerce) users, logistics & distribution, consumer nondurables and manufacturing.  Total retail requirements account for a third of total demand, most of which is concentrated in the Northeast, and vacancies are expected to decline in markets such as New Jersey as absorption gains occur.

Regionally, Southern California tenant requirements for big-box remain flat; the Southest is unchanged; and requirements in the Midwest are down by 26%, a function of robust leasing activity in quarters past, JLL reports. In the latter region, e-commerce retailers presently lead all other industries.

Speculative construction is occurring in nearly all markets, according to the firm. In most markets, tenants with requirements in excess of 750,000 square feet will not find much choice with existing inventory and will need to pursue build-to-suit opportunities. Also, e-commerce accounts for more than 10% of total US construction, indicating that this demand driver will continue to grow as Internet purchases become more popular.

While “mega-box” still reigns, substantial leasing volume of larger facilities across the US has pushed demand to smaller size segments as the supply of quality spaces has dwindled, user competition has escalated and rents have increased, reports JLL. This has also encouraged small and mid-cap distributors to re-enter the market and take space before values appreciate. All of these factors help explain why construction is on the rise.

Stay tuned to the West page for more NAIOP Conference coverage this week.