Since our year-end 2021 Industrial Pipeline Report, the macro fundamentals of industrial real estate have experienced seismic shifts that have had some immediate impacts on current development activity, and will surely impact development moving forward. In the second half of 2022 and beyond, developers will continue to face challenges with construction costs, construction timelines, and capital markets.

“It’s very challenging to finance a project when your capital partner can’t predict their exit cap rate, lease rate, cost of construction, and when the project will deliver.” 

- NATIONAL DEVELOPER 

While throughout much of 2021 the headlines centered around steel shortages, 2022 has centered around shortages of other materials accompanied with increased costs across the board. Roof material delays (improving), cement shortages (showing very recent signs on improving), pit lever shortages, and switchgear shortages have remained constant in the first half of 2022. Just when some items seem to improve, other items, such as HVAC systems and utility infrastructures, surface as new challenges. The recent rise in petroleum pricing has caused direct increase in sitework and overall material costs. Many bulk projects experienced roofing material delays, cement delays, or both leading to delivery times being extended by as much as 4 months. Therefore, while our Industrial Pipeline Report shows 43 million square feet under construction, some of this inventory should have already delivered. The unanticipated consequence of this delay in deliveries is that pre-leasing is at historic levels, with almost 40% of this pipeline pre-leased.

On the capital markets side, the spike in US Treasuries has shifted cap rates up, but without significant sales of stabilized projects to point to, the market still has not had time to digest and underwriting of future projects is still uncertain. Additionally, some construction lenders are reportedly pausing until they have more data points to better predict future market direction. 

Conversely, leasing demand has remained strong and Atlanta industrial fundamentals for vacancy and rent growth remain at historic levels. Therefore, any slowdown of development should only help to keep markets from experiencing oversupply. Furthermore, longer entitlement periods and construction timelines will not have a real impact on market inventory until 2024.