Infill Land Pricing and Development Trends

Key Takeaway

Site selection criteria for logistics and distribution occupiers evolves as new customers are procured, service level requirements change, new products are launched, and costs shift. The optimal location provides the best balance of service and cost. Critical to competitive positioning is having the right items at the right place at the right time, and increasingly that time is right now. Throughout the U.S., the tightest conditions can be found in submarkets proximate to population centers with the highest barriers to supply. Retailers, both online and traditional, and third-party logistics firms are working to get closer to the consumer. This has been a boon to owner and developers of entitled land adjacent to urban areas. For many retailers, future sales – and profits – will be dependent on how quickly and consistently goods can be delivered to customers in major metro areas. Developing robust, flexible, highly responsive final mile networks is essential. As a result, upward pressure on infill land pricing – and the premium placed on assembled, entitled land ready for development – will continue to increase.

Want to See the Data? Read On

Smaller Warehouse, Bigger Price and Performance

Although secondary markets have seen an increase in development, activity in primary markets has been much stronger, particularly in core markets like the Inland Empire, Chicago, Atlanta, Dallas/Fort Worth, and the Pennsylvania I-81/I-78 Distribution Corridor, each of which currently has in excess of 10 million square feet (msf) in the construction pipeline. With projected national occupancy gains of 425 msf in warehouse/distribution space in 2017/18, activity will remain strong. At the same time, limited land availability and high land prices are making urban facilities in top markets more expensive.

Infill-sited warehouse product has outperformed less supply constrained greenfield-sited warehouse product in occupancy by more than 300 basis points (bps) over the past 10 years. The occupancy gap has been widening over time with infill warehouse occupancy rates 370 bps higher than greenfield warehouse in Q2 2017 (96.3% and 92.6%, respectively). Healthy demand and tight supply have made infill warehouse product among the best performing of all commercial real estate segments. In 2016, it boasted the highest year-over-year rent growth of any property type at 9.8%, compared to 5.6% for greenfield-located warehouse, 4.3% for office product (all classes), and 2.6% for shopping centers.

The Need for Speed – Assemblage and Readiness

Corporate real estate professionals are particularly interested in shovel-ready “certified” sites. An increasing number of owners are working with land-certification companies that complete zoning, wetland studies, and utilities improvements upfront when marketing a parcel for sale or as a build-to-suit opportunity. Just because one parcel may be available and ready to sell does not mean adjacent parcels, which may be needed for an industrial requirement to be developed, can be added to the assembled project. Large tracts of entitled land in the location and configuration desired by tenants is increasingly difficult to find. For industrial occupiers it is all about location and the need for speed – the quick assemblage and occupancy of an essential supply chain node that allows them to meet customer expectations of same-day (or even same-hour) order fulfillment.

Investor Interest

Increasingly, investors are taking note of warehouse properties in infill locations. Part of the attraction to investing in such product is its steady occupancy and rent growth, and its stronger rent growth is partially attributable to the cost and complexity of developing an infill site. The vast majority of warehouse construction over the past decade has been on greenfield sites located at the periphery of metropolitan areas in close proximity to transportation infrastructure that allows for efficient regional and national fulfillment. With land costs rising, especially in “final mile” locations, multi-tenanted warehouse values on infill sites are 22% higher than the broader warehouse market and pricing continues to increase. Strong investor demand has pushed up prices, which stood at $82 per square foot at year-end 2016, a 5.1% increase from the previous year and 31% above the previous peak. Given the transformation underway in the industrial sector – where development of robust and responsive final mile networks are critical – values and investor interest in infill warehouse product will continue to rise.