The need for industrial logistics space has never been higher. In compiled research by JLL across sixty US markets, vacancy rates for warehouse space is the lowest on record. Fueling this gap in supply is the fact that three quarters of the industrial warehouse space in the United States is twenty years or older. This inventory has lower ceiling heights, fewer dock doors, and limited trailer parking. This is especially a problem for overnight and next day deliveries which have exploded in popularity during the Covid era. The ability to meet this demand has led industrial developers to pay higher land premiums for urban area locations. Rents nationally are up 37% from one year ago, with the hottest markets including New York City, Los Angeles, and other coastal cities up 50% year over year.
Two main strategies have emerged, new construction and rebuild/reuse. New construction provides for state-of-the-art multistory space including higher ceiling heights for innovative storage, office type amenities for workers, while on the exterior ample room for truck maneuvering and trailer storage is now a requirement. Once complete, new Class A space is 70% preleased. Mega box development has outpaced all other projects overtaking small box development which has accounted for 60% of new construction. The barriers to entry for this Class A mega box development are soaring construction costs up 21% from a year earlier, lead times for construction materials and building delivery have more than doubled since the pre-pandemic era. Further compounding this problem is the lack of available labor, with average new construction now taking two years. In the most competitive markets, which often include some of the oldest warehouse space in the country, adaptive reuse is popular, with vacant big box stores and shopping malls top choices as they provide for ample height and favorable transportation logistics, as well as the ability to include creature-comfort amenities. The challenges for reuse projects are often local zoning and transportation limitations.
The newest markets including the Sunbelt are leading population migration as they provide for more affordable housing and a robust job market for workers. This migration is peaking the demand for industrial space. Rents are expected to increase by at least 8% nationally in 2022 making it a leading factor in executive decisions on where and how to obtain more usable space. The Sunbelt is leading in new construction and attracting top labor with facilities located in less dense urban areas, allowing companies to scale to meet demand. This will be an ongoing strategy moving into 2023 and beyond.
This rapid growth may be impacted by economic headwinds including unprecedented inflation, world events, and rising energy costs. It is yet to be determined if this will slow demand for industrial space.