Industrial Construction Continues to Rise in Midwest
The Midwest industrial engine continues to grow, with construction moving at a strong pace despite an unprecedented increase in materials pricing that is straining the development sector. This activity is occurring in many large markets as well as growing secondary markets, such as several in the Midwest, stretching from Nashville to Indianapolis to Kansas City.
According to a May 2021 Market Report from Avison Young, Nashville has 10 msf of new industrial space under construction and has had more than 1.4 msf 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.
Nashville Construction Overview
The Nashville market is witnessing its largest growth cycle on record, with expansion coming at an exponential pace, according to Avison Young research. Motivated by steady tenant demand and tight market conditions, developers remain bullish on Nashville, with over 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 sub-5% vacancies.
Soaring demand for warehouse and logistics space across the market has largely kept up with a record amount of supply coming up over the past few years. The Nashville industrial market recorded over 1.6 msf in YTD net absorption at the end of the first quarter.
Indianapolis Grows Its Logistics Hub
Indianapolis’ industrial market has nearly 12 msf currently 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 msf building in I-70 West Commerce Park by Sunbeam Development to the 767,000 sf 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 msf under construction; Cincinnati, where 6.1 msf is under construction; Louisville, which has 5.2 msf underway; and Minneapolis, which has 2.5 msf under construction.
Construction Prices: Steel, Lumber See Sharp Increases
The Avison Young report notes that skyrocketing costs on steel, plywood and other building materials are not enough to significantly slow the industrial pipeline, which currently exceeds 300 million square feet (msf) nationally.
This strong activity continues despite a 12.8% increase in the overall cost of construction input items from April 2020 to February 2021. While many broad material categories have increases below 10%, key individual materials have seen sharp increases — including lumber and plywood, which rose 62%; copper and brass mill shapes (37%); and steel (20%), according to the Associated General Contractors of America (AGC) trade association.
Construction across many U.S. markets is expected to keep a strong pace into 2021, as developers try to meet demand from major retail fulfillment centers to food grade cold storage facilities. Consumer expectations are setting the standards for speed and diverse inventory from e-commerce, and those expectations are unlikely to diminish as delivery conveniences have now become commonplace.