Welcome To Normalization: Warehouse Demand Takes A Dip, But Remains Strong

Not long after the advent of Covid-19, South Florida experienced an unprecedented demand for industrial properties.

Frank Trelles, executive VP of State Street Realty, said his phone didn’t stop ringing for two years.

“We were crazy on fire,” Trelles said, adding that his phone still rings – but nowhere near as much.

That clamor for warehouse and distribution space was fueled by an influx of out-of-state companies and high-income households, which sparked a rise in demand for e-commerce and logistics services. International supply chain hiccups only exacerbated the need for storage space.

Today, South Florida’s industrial properties remain a valuable commodity for landlords and real estate investors as vacancies hover near record lows and rents continue to rise, developers and brokers say. However, with more warehouses being built and businesses less desperate for storage space, the wild days of annual double-digit rent hikes are long gone.

But with millions of square feet of new industrial space coming online, could a correction on rents be far behind?

A Perfect Storm

The pandemic forged the ideal conditions for South Florida’s industrial market to take off, though it wasn’t apparent at first. For several months in 2020, business stalled due to the global shutdown.

“There was nothing coming in,” said Modesto Gil, CEO of Doral-based Triton Logistics. “And then, all of a sudden, it got crazy.”

“By the end of 2020, global tourism and trade flowed again,” said Audley Bosch, an executive managing director in JLL’s Miami office. “And because Miami is a major trade hub, South Florida rebounded.”

That demand was further enhanced when Gov. Ron DeSantis signed an executive order banning local governments from enacting Covid-19 restrictions. This set in motion a chain reaction: business owners, remote working professionals and wealthy households moved from other parts of the U.S to South Florida, in part to avoid restrictions in other states.

Larger companies, such as Amazon, FedEx, Wayfair and Home Depot, snapped up most of the tri-county region’s warehouse space, thanks in large part to the state’s overall population growth spurt.

Intermittent shortages in goods and materials also increased demand for warehouses as business owners sought places to store whatever materials they could get their hands on.

All that activity led to a wave of rent hikes. In the past five years, between the second quarters of 2018 and 2023, asking rents for warehouse and distribution space increased 56.49% to an average of $15.57 a square foot in Miami-Dade County, 82.97% to $15.04 in Broward County, and 58.09% to $13.58 in Palm Beach County, according to Colliers’ market reports.

Back To Normalization

Now, that growth wave is showing signs of subsiding.

At the same time, developers have finally caught up to the demand and are finishing new warehouse projects in all three counties.

And industrial space isn’t filling up quite as fast as it used to, either. The new Class A warehouse buildings are being delivered with up to 35% of their space leased, JLL’s Bosch said. During 2021 and 2022, warehouses under development were preleased at 50%. Additionally, there are fewer businesses competing for unclaimed industrial space.

Holding Strong

This doesn’t mean that rents will suddenly crash – at least not yet.

As of the second quarter, the vacancy rate was 1.6% in Miami-Dade, 3.2% in Broward and 3.9% in Palm Beach, according to Cushman & Wakefield figures.

“That is extremely tight market conditions, even with new buildings being brought on the market,” said Eric Messer, a senior researcher at Cushman & Wakefield. “Anything that is below 5% is like, ‘OK, landlords have the upper hand in negotiations.’”

“Insurance costs, taxes and maintenance (labor) are also passed on to tenants – and those rates are rising fast,” said Malcolm Butters, president of Coconut Creek-based Butters Group, a developer of industrial parks in all three counties. “It’s doubled from 50 cents to $1 a foot. This will eventually help push industrial rents to more than $20 a square foot.”

Future Direction

The demand for industrial space will eventually wane, at least on the national front.

“During the pandemic, it went from building 300 million square feet a year to 600 million square feet a year,” Butters said. “That’s really not sustainable. South Florida’s industrial sector will slow, as well, by 2024 and 2025. We will be less active. It doesn’t mean a crash; it just means it will be slower.”

Ultimately, industrial properties in South Florida will remain valuable, mostly because there aren’t a lot of places left where new buildings can be constructed.

“There’s a high barrier of entry. You can’t just go out and buy a piece of land and build a warehouse, like in other parts of the U.S.,” Butters said. “It’s too expensive.”

Meanwhile, many local industrial tenants will face their own tough choices as multiyear leases expire.

“They’ll have to renew or go out to the market and try to move,” Hartsook said. “Either way, these businesses will be paying rents that are double the rate they used to pay.”

“Local industrial space users will persevere,” said VSRE’s Velasquez. “Because of the higher rents, they’re adapting their business strategies.”

That includes automating their warehouses to save on labor costs, or leasing newer and more efficient spaces that companies can move product in and out of faster.

The industrial boom hasn’t just been good for warehouse owners, though. Logistics companies have also flourished.

Gil, who started Triton Logistics 17 years ago, said 2021 and 2022 were banner years for his business. But this year, business has declined somewhat. Still, he isn’t worried. In September, Triton Logistics will move from Doral to a new, larger 192,000-square-foot warehouse in Countyline Corporate Park in Hialeah.

“We’re still humming along,”  Gil said.

Source: SFBJ