The series of interest rate increases initiated by the Federal Reserve in early 2022 has helped curtail the record wave of new distribution center development that was underway. Throughout the summer of 2023, industrial tenant demand softened and the pullback in groundbreakings grew more extreme.
Since the beginning of July, only about 45 million square feet of industrial properties started construction in the United States, according to CoStar data. If developers continue at this pace through this month, it will result in the lowest tally for the third quarter of U.S. industrial construction starts that CoStar has recorded since 2013.
However, it will take several months before the recent pullback in groundbreakings translates into fewer options for industrial tenants seeking newly built space. Industrial construction starts reached the highest in more than 30 years in 2022, despite slowing during the final months of that year. Many of the projects that started last year have also since encountered delays due to shortages of a range of building components including structural steel and electrical switchboards.
This all means that the U.S. industrial market still faces a deluge of unleased new distribution space completing construction in late 2023 and early 2024. However, the average time spent under construction for large industrial projects completed so far in 2023 was 14 months. Even if delays mount further and construction timelines rise another 10% to 15%, by late 2024 or early 2025, the amount of new industrial space completed each quarter is set to hit a 10-year low, an after-effect of the pullback in construction starts that is underway.
The relative dearth of new industrial space set to complete construction in late 2024-2025 suggests that if tenant demand for industrial space begins to recover during that period, empty industrial space available for lease could once again decline rapidly.
The recent pullback in industrial construction starts has not played out evenly across U.S. markets. Faster-growing metropolitan areas such as Austin, Phoenix and Las Vegas all have large amounts of open land on their exurban fringes. In these markets, construction starts for unleased industrial properties over the past four quarters have still been running ahead of typical annual net absorption rates, the amount of additional space occupied by tenants, averaged in each of these markets over the past five years.
By contrast, in most other large markets, construction starts of distribution centers over the past four quarters have fallen well short of the five-year historical average for annual net absorption. That list includes such major markets as Houston, Chicago and Columbus, Ohio, where industrial construction levels have historically ranked among the highest in the United States.
Atlanta stands out as having seen one of the most dramatic reductions in construction starts of any major U.S. market in recent quarters. Over the past four quarters, construction starts for unleased industrial properties have totaled just 6.2 million square feet. That figure is more than 70% below the average for construction starts during the previous two years and is also less than half of the annual net absorption Atlanta averaged over the past five years.
This all means that very little new industrial space will likely be wrapping up construction in Atlanta during late 2024. If tenant demand for additional space during that period is anywhere close to the market’s long-term average, the market for distribution space there will tighten significantly.
The bidding war for Yellow Corp.’s highly sought-after truck terminals has ended with Estes Express Lines’ stalking horse offer winning big.
Estes’ $1.525B bid, offered last week, bested Old Dominion Freight Line’s $1.5B offer. The news came in a Thursday order filed by the U.S. Bankruptcy Court for the District of Delaware, FreightWaves reported. The court also approved Estes’ bid protections, including a $7.5M breakup fee and up to $1.6M in expense reimbursement.
“We are pleased to announce that we have been formally approved by the court as the real estate stalking horse bidder,” an Estes representative told FreightWaves. “We continue to believe our transaction is mutually beneficial to both Estes and the Yellow bankruptcy estate. We look forward to continuing in this process and working collaboratively with the parties in the case, and we appreciate everyone’s continued efforts.”
A full sales process will still occur for Yellow’s assets, which means Estes likely won’t walk away with all 174 terminals in the portfolio. The bid deadline is set for Nov. 9, and an auction will take place on Nov. 28.
Earlier this month, Yellow sought court approval to back out of 37 leases across the country, including truck terminals, offices, warehouses and outdoor storage spaces.
The bidding war started after Old Dominion topped Estes’ initial $1.3B bid in late August, revealing intense interest in the rare trading opportunity for the asset class.
In response to Old Dominion’s bid, Estes raised its offer and proposed a lower breakup fee and other terms to help Yellow pay off creditors. Yellow filed for Chapter 11 bankruptcy on Aug. 6 after almost a century in business due to a number of acquisitions and $1.5B in outstanding debt as of March. The debt was due in part to a $700M federal government loan it took out early in the pandemic, CBS reported.
Yellow had enjoyed a roughly 10% market share in the long-distance trucking industry and moved roughly $5B each year, Forbes reported. The next items to be auctioned are the company’s 12,000 tractors and 35,000 trailers.
Companies from e-commerce retailers to third-party logistics providers are leasing less new warehouse space amid weak freight demand, high interest rates and shifting consumer spending.
But the industrial real-estate market hasn’t completely cooled off after three years of frenetic expansion. The amount of storage available remains historically tight, industry experts say.
The industrial market is “starting to slow,” said Matt Dolly, research director of real-estate services firm Transwestern. “I’m not going to say the brakes are on, but the foot might be off the gas and maybe they’re in cruise control.”
Companies rushed to add hundreds of millions of square feet of warehouse space from 2020 through 2022 to meet pandemic-driven e-commerce demand. Those decisions drove the nationwide vacancy rate down to nearly 3% as of late last year, and some markets such as Southern California were effectively full.
The red-hot growth pace of the industrial property sector has contrasted with the commercial real-estate market, which has been pummeled by fading demand for office space.
The pace of industrial leasing has receded and vacancy rates are ticking up, but business remains strong by historical standards, with companies still taking enough new space to keep warehouse rents climbing.
Logistics operators leased about 205 million square feet of warehouse space in the second quarter. That was down from the 235 million square feet leased in the same period a year earlier, but still significantly higher than 135 million square feet in the second quarter of 2019, according to real-estate services firm CBRE.
Hamid Moghadam, chief executive of Prologis, the world’s largest owner of industrial real estate, said there is still demand from companies looking to expand.
“Is it as great as it was in ‘21 and ‘22? No, but you know, in 40 years of doing this, those were by far the two best years” he has seen, Moghadam said. “I would say this year so far has been one of the top five.”
Moghadam said some of the demand is coming from companies that are looking to hold more inventory closer to their customers after grappling with supply-chain disruptions the past few years.
“People realized they’re running too lean on inventories and they’re out of stock whenever something bad happens,” he said. “So people are carrying a little bit more inventory in the system.”
The Logistics Managers’ Index, a monthly survey of supply-chain managers, showed available warehouse capacity grew in August but at a slower rate than in July.
Retailers such as Target, Sam’s Club and Amazon.com have been opening more logistics facilities this year focused on speeding up e-commerce deliveries.
More warehousing space is also becoming available as companies seeking to cash in on federal subsidies for manufacturing electric vehicles, EV batteries and semiconductors build facilities across the U.S.
Broader geopolitical tensions that are driving North American companies toward nearshoring, returning production that had been done in Asia, is also driving warehouse demand. The addition of manufacturing facilities in the U.S. and Mexico is leading those companies and their logistics providers to set up distribution centers to serve the burgeoning market.
C.H. Robinson Worldwide, the largest freight broker in the U.S. by revenue, this month opened a 400,000-square-foot warehouse in Laredo, Texas, to handle the flow of goods between the U.S. and Mexico.
Manufacturers accounted for 8% of all warehouse leasing as of mid-2023, up from 6.7% a year earlier, according to CBRE.
E-commerce has been a major driver of industrial real estate demand, boosted by Amazon’s rapid expansion of logistics capabilities during the pandemic. But Amazon has pared back its warehousing expansion, leaving more room for other logistics operators to build.
“We’re seeing some of the smaller and midsize companies get some opportunities that they were boxed out” of by Amazon, said Transwestern’s Dolly.
Warehouse rents have continued rising as companies have slowed their leasing decisions, a sign that the market remains tight, experts say.
Tight capacity is helping keep the price of industrial real estate relatively high by historical standards. Developers raced to build more industrial real estate starting in 2020 to meet demand. They’ve started cutting back their plans more recently amid rising borrowing costs.
About 110 million square feet of new space began construction in the second quarter, down 55% from a year earlier, according to real-estate analysis firm CoStar Group.
Larger supply-chain trends, including efforts to make distribution networks more resilient, are also bolstering demand.
Importers have shifted more shipments to East Coast and Gulf Coast ports after big containership backups at West Coast ports caused massive cargo delays during the pandemic. The diversions, triggered early in the pandemic by bottlenecks at the West Coast ports and later by the potential for labor disruptions, have eased but the impact is still reaching inland logistics markets.
The shifting import volumes have prompted developers to build logistics real estate to meet growing demand for storage in those markets, experts say.
Sitex Group has acquired a 50-building, 640,000-square-foot industrial park in Saddle Brook, marking the first sale of the campus since its development began nearly a century ago.
The firm, which is based in Englewood, paid an undisclosed price for what’s long been known as Zuckerberg’s Industrial Park at 300 North Midland Ave. It noted that the Zuckerberg family has held the 40-acre property for three generations, adding that the first building went up in the 1930s.
“We are thrilled to acquire the park,” Sitex Principal Blake Chroman said. “Buying an industrial park of this size in prime infill New Jersey — particularly in Bergen County — is incredibly rare. Over the past decade, we built a relationship with the sellers and always hoped that we would own it someday. We are grateful that the Zuckerberg family selected us to be the new owners.”
In a news release, Sitex noted that Zuckerberg’s Industrial Park is home to 50 buildings and a four-acre trailer parking lot. Tenants include large, notable companies such as UPS, SERVEPRO and Johnstone Supply along with many local companies, while the property offers quick access to Interstate 80 and the Garden State Parkway as well as Port Newark-Elizabeth, Newark Liberty International Airport and New York City.
The now-former owners kept occupancy at more than 90 percent for years, Sitex said, but the latter now plans to honor the Zuckerberg family legacy while modernizing the park. Planned improvements include paving, lighting, new signage and updated building interiors.
“We have the right team in place which enabled us to navigate the complexities of this transaction and swiftly close,” Sitex Vice President Jackson Kaplan said.
The firm announced in April that it had closed more than $350 million in transactions in northern New Jersey in the prior 12 months.
“This was a very unique acquisition opportunity and is another example of our longtime strategy of buying and repositioning industrial properties in key infill locations throughout New York and New Jersey,” Chroman said.
Container rates for U.S. imports have normalized. Rates for America’s exports have not. Both spot and contract rates for U.S. exports are still up double digits from pre-COVID levels.
And rates are not the biggest cost issue exporters face, according to Peter Friedmann, executive director of the Agriculture Transportation Coalition.
He told FreightWaves that sailing schedules are now more irregular than before the pandemic, while ocean carrier communications to exporters are as bad as ever.
Consequently, exporters are paying more in detention and demurrage and spending more on storage and trucking due to insufficient communications on erratic sailing schedules than they did prior to 2020.
“Higher rates have not been the primary issue because the rate issue is being overwhelmed by the additional costs imposed on exporters by the carriers’ inability or unwillingness to provide timely and accurate data on things like ERD [earliest return date], when the ship is coming in, and which terminal exporters should send the cargo to,” said Friedmann.
Spot and contract rates still elevated
Import rates collapsed back to pre-pandemic levels following the end of the supply chain crisis (in some lanes, to below those levels). The indexes do not show the same reversion for export rates, at least, not yet.
For the week ending Thursday, the World Container Index (WCI) of U.K.-based Drewry assessed spot rates in the Los Angeles-to-Shanghai lane at $838 per forty-foot equivalent unit. The WCI New York-Rotterdam rate was at $734 per FEU. These rates are well below pandemic peaks, but still up 66% and 27%, respectively, versus rates five years ago.
In contrast, on the import side, WCI’s Shanghai-Los Angeles spot index was down 9% from September 2018, and its Shanghai-New York index was down 16%.
Blue line: Los Angeles-Shanghai. Green line: NY-Rotterdam. Orange line: Shanghai-Los Angeles. Purple line: Shanghai-NY. (Chart: FreightWaves SONAR)
Norway’s Xeneta tracks long-term contract rates, which show the same pattern: down from highs but up versus pre-pandemic.
According to Xeneta data, long-term rates in the West Coast-Far East trade for dry cargo containers averaged $1,171 per FEU as of Sunday, up 39% from mid-September 2019. Long-term rates for 20-foot refrigerated containers were assessed at $3,732, up 32% from four years ago.
In the trans-Atlantic eastbound trade, Xeneta assessed average long-term rates from the U.S. East Coast to North Europe at $909 per FEU (for dry containers, non-reefer) on Sunday, up 13% from mid-September 2019.
‘The biggest challenge right now’
Friedmann explained how carrier service strategy on the import side, combined with a lack of timely data, has translated into higher costs for exporters compared to the pre-pandemic era, above and beyond the rate issue.
“What determines the carriers’ placement of ships and services is the inbound cargo,” he said. “Export volumes and revenues are not their primary concerns when making that determination. And as import volumes have dropped, carriers have adjusted — and they’re still adjusting. The erratic schedules remain an issue and the question is how long it will last.
“The decision to blank [cancel] a sailing is not made three days before the ship is supposed to call at the terminal. Why aren’t carriers providing that information immediately upon making a decision?” he asked.
“When you go to the airport, your phone is blowing up with text messages saying the flight is delayed three minutes or the gate of departure is now E31, not E26. These are flights that are only a few hours long. Exporters ask: Why can’t ocean carriers tell them the date, time and terminal of arrival for a two-week voyage?
“I can’t tell you how many hours our agriculture exporters spend on the phone trying to find out which terminal they should send their exports to. The ocean carrier people will tell them: ‘We don’t know for sure. You’d better call the terminal.’
“I’m not saying people like paying higher freight rates, but you can kind of budget for freight rates. What’s impossible to budget for is when a carrier blanks a sailing or skips a port and doesn’t tell you soon enough — or a terminal is closed — and you’ve got storage costs and production costs and all sorts of additional trucking costs, and detention and demurrage charges that dwarf the freight rates. That’s the biggest challenge right now.”
Exports trending better than imports
U.S. export demand has held up much better than import demand over the past year, so it makes sense that export rates have not fallen as steeply as import rates.
According to Friedmann, “Part of that is because some goods imports are more discretionary to the ultimate consumer. On the export side, there isn’t any discretion. [Some of] the ultimate consumers are animals that need to eat. You’ve got the hogs in China that need our soybeans and the cattle herds in Japan that need our hay and the construction industry that needs our lumber.”
Independent analyst John McCown tracks imports and exports from the top 10 U.S. ports. During the 12 months through July, exports from the top 10 ports increased 1.2% compared to the prior 12 months. Imports were down 16.7%.
McCown also tracks the three-month trailing average of the change in imports and exports. “During most of the pandemic period imports outperformed by a wide margin. However, those trend lines crossed at the end of last summer and export volume growth has outperformed import growth since,” he wrote.
What’s shipped in US export containers?
While the U.S. fronthaul (imports) is largely driven by consumer goods, equipment and components, the backhaul (exports) is largely driven by empty containers, refuse and scrap, and containerized agricultural products.
Data from the main West Coast ports — Los Angeles, Long Beach and Oakland in California and Seattle and Tacoma in Washington — shows that only 39% of containers leaving the ports in January-July were loaded with exports. The rest were empty.
This is up from a low of just 31% in the first seven months of 2022, when the supply chain crisis constricted export capacity by favoring returns of empties to Asia.
The current level is still below the 46% share of laden export containers from these ports in January-July 2019, pre-COVID.
The U.S. Census Bureau compiles data on containerized exports by Harmonized System code, measured in kilograms. The top 10 categories accounted for 70% of the total in January 2019 through this July.
The top category, with an 19% share, was wood pulp and paper, including scrap and waste. There was more refuse in the second-place category: plastics including waste and scrap, at 12%. An agricultural category came in third — oil seeds, grain, fruit and nuts — with 10%.
In fourth place, more garbage: food industry refuse and waste, at 6%. Wood was in fifth, at 5%. This was followed by iron and steel, including more refuse — scrap metal (5%); mineral oils and mineral wax (4%); then another agricultural product, meat (4%); followed by cotton and yarn (3%) and salt, cement and plaster (2%).
The Northern New Jersey industrial market is finding itself in unfamiliar waters this year as industrial space users are returning more space to market than they are occupying for the first time since 2012.
That was the last time that net absorption, or the difference between occupied and vacated space, was negative over a full year. As of mid-September, 2023, the Northern New Jersey industrial market is on track to post annual net absorption of -2.1 million square feet.
Northern New Jersey’s industrial market has been weighed down by lower activity in Newark, the largest industrial node in the Garden State, with an inventory of over 45 million square feet. Despite its reputation as a logistics hub due to its proximity to Newark airport and the port district, the city has seen its availability rate for industrial space jump to 5.2% from just 3.3% a year ago, as tenant move-outs have outpaced move-ins by approximately 1 million square feet.
A partial answer to Newark’s ills may lie in its relative lack of new supply. The city’s inventory has expanded by just 1.5 million square feet over the past decade, or about 4%, which is less than its neighbors, Linden and Elizabeth, which have expanded their industrial space by 21% and 7%, respectively. As a result, those competitive areas have offered prospective occupiers large modern spaces without sacrificing proximity to the ports.
Recent leasing activity helps to illustrate this trend. Overall leasing volume in Newark, which includes both new lease commitments and renewals, totaled 293,000 square feet in the first half of the year, a 47% decline from the comparable period in 2022. While Elizabeth’s industrial leasing was similarly weak, Linden witnessed an explosion in new signings, largely driven by project completions at the Linden Logistics Center. This has helped steer demand a few miles down the turnpike from the aging stock in Newark toward Linden.
Subdued leasing activity portends lackluster future absorption over the next six to nine months. CoStar models forecast that Newark’s occupancy level will continue to decline through year-end, driven mostly by the more residential neighborhoods west of Route 21. Here, industrial vacancies are expected to rise past 7%, compared to an expected increase of just over 2% at the waterfront.
The freight market isn’t what it used to be. Following months of overcapacity and a weak peak season outlook, experts say the environment is ripe for more mergers and acquisitions.
In the past 2 ½ years, the trucking industry rapidly expanded to cash in on the pandemic fueled buying frenzy, which saw shippers paying historically high rates to get goods to market. Now smaller carriers — especially those who sought to cash in on record rates and took on debt to buy equipment — are struggling to make ends meet in a weak economy, industry experts said.
“Now you’ve got a lot of small and medium-sized companies whose profitability has dropped off monetarily,” said Peterson Hawkins with Lilium Group, a private equity firm.
As businesses in this situation seek a way out, larger carriers with cash on hand see a buying opportunity.
“It’s kind of a perfect storm for a lot of acquisitions,” Hawkins said.
More deals are on the horizon
The fourth quarter of 2021 was the top of the seller’s market, according to Billy Hart, managing partner for M&A consultancy Bluejay Advisors.
In the years that followed, companies and owners weathered economic uncertainty, supply chain disruptions and rising interest rates, altering acquisition dynamics. Now, companies that have weathered the pandemic and the related economic events are ready to exit, Hart said.
Beyond the economy, generational trends are also influencing the acquisitions market. “Baby boomers are desiring to exit their companies,” Hart said, noting many carriers lack a succession plan. “They want to monetize what they can and be done with it.”
Blujay Advisors’ analysis suggests M&A volume will slowly increase in the coming quarters with the second half of 2024 returning to a more robust deal market.
This assessment is shared by the accounting and consulting firm KPMG.
Scott Heery, a KPMG partner who specializes in transportation and manufacturing M&A, said more and more trucking executives are engaging consultants to about sell opportunities in the past year, and momentum is building for a busy 2024.
“We can see that from the sellers that are starting to get ready and go to market … they’re talking to bankers, so I think we’re close to the turn,” Heery said. “I think there is going to be a spike in ’24 and it will accelerate consolidation again within the [trucking] sector.”
Willing to wait for the right acquisition
Despite weak rates and a soft economy, some of the nation’s largest carriers have expressed a desire to expand.
Executives with Schneider National and Hub Group both indicated during recent earnings calls an openness to continue their respective growth strategies through acquisition.
Hub Group President and CEO Phillip Yeager said in July that his company maintains “a strong pipeline of acquisition opportunities” that could bolster its non-asset logistics segment. And while Schneider National recently bought M&M Transport and does not plan more deals this year, CEO Mark Rourke in August said future purchases of well-run dedicated contract carriers with a 25- to 30-year history and no solid succession plan are on the table.
There are plenty of privately held companies that fit that description with owners who will eventually want out, Jonathan Phares, assistant professor of supply chain management at Iowa State University, wrote in an email to Trucking Dive.
“Carriers with valuable books of business or strong asset bases are more likely to be acquired than small carriers with fewer shipper relationships and trucks,” Phares said.