Avison Young: Industrial construction keeps soaring despite rising materials costs

June 2, 2021

Published in REJournals.com by Dan Rafter

"Consumers were flocking to online shopping before COVID-19 hit. Now, as the pandemic appears to be winding down, even more have embraced the simplicity of ordering groceries, clothes, electronics and more online.

And these consumers want their products to show up at their doors as quickly as possible. This has fueled an industrial boom that has held strong throughout the pandemic. According to a new report from Avison Young, this has led to an equally strong increase in industrial development, one that doesn’t look ready to slow anytime soon.

According to May research from Avison Young, industrial development is especially strong in the Midwest, with construction moving at a strong pace even with an increase in the costs of materials. This rise in construction is taking place in both large markets and in secondary markets such as Nashville, Indianapolis and Kansas City.

According to a May 2021 report from Avison Young, Nashville has 10 million square feet of new industrial space under construction and has had more than 1.4 million square feet of new product delivered in each of the past three quarters.

“We continue to see industrial development increasing in many Midwest markets, as companies expand e-commerce and logistics operations in strong regional distribution hubs,” said Erik Foster, Avison Young Principal and leader of the firm’s National Industrial Capital Markets Group.

The Nashville market is in the middle of its largest growth cycle on record, with expansion coming at an exponential pace, according to Avison Young. Motivated by steady tenant demand and tight market conditions, developers remain bullish on Nashville, with more than half of the projects underway being built on a speculative basis. Even as new speculative construction adds inventory to the market, all submarkets continue to record vacancy levels under 5 percent.

The Nashville industrial market recorded more than 1.6 million square feet in net absorption at the end of the first quarter of this year.

It’s been impressive in Indianapolis’ industrial market, too. The industrial market here has nearly 12 million square feet under construction, consistent with the level of new construction underway for the last 15 months.

Larger tenants have recently shown an interest in Indianapolis because of its central location and lower tax structure, but much of its recent construction has been driven by speculative projects. Large speculative projects under development range from the 1-million-square-foot building in I-70 West Commerce Park by Sunbeam Development to the 767,000-square-foot building in Whiteland Exchange, I-65 and Whiteland Road, by Jones Development.

Other Midwest markets experiencing industrial growth include Kansas City, which has 7.9 million square feet under construction; Cincinnati, where 6.1 million square feet is under construction; Louisville, with 5.2 million square feet; and Minneapolis, which has 2.5 million square feet under construction.

The big challenge for industrial construction? The rising cost of materials. Construction costs are rising quickly today.

But in good news, the Avison Young report said that skyrocketing costs on steel, plywood and other building materials should not slow the industrial pipeline, which currently exceeds 300 million square feet across the nation.

This strong activity continues despite a 12.8 percent increase in the overall cost of construction input items from April 2020 to February 2021. While many broad material categories have increases below 10 percent, key individual materials have seen sharp increases. This includes lumber and plywood, which rose 62 percent; copper and brass mill shapes, which increased by 37 percent; and steel, which rose by 20 percent, according to the Associated General Contractors of America.

Construction across many U.S. markets is expected to maintain this pace throughout 2021, as developers try to meet demand from everything from retail fulfillment centers to food-grade cold storage facilities."