Drive by one of Jacksonville’s biggest Amazon.com centers or the Wayfair warehouse and the size stands out.
The facilities are at least 1 million square feet in size.
By comparison, that’s more space than in the Bank of America Tower, Downtown’s tallest building.
Perhaps more visually, they are closer to the square footage of The Avenues and Regency Square malls.
They’re big.
Developers who build them on spec – speculatively, without a signed tenant, although with the expectation that tenants are looking – take a chance, which is why there aren’t many.
The two that were on the market are now leased and tenants are expected to be in and operating by year-end.
Total Distribution Inc. confirmed it will move into the 1 million-square-foot warehouse in Florida Gateway Logistics Park in West Jacksonville.
Sam’s Club is widely believed to be the code-named Project Crystal for the 1 million-square-foot warehouse expected to complete construction this month in Imeson Park South in North Jacksonville.
But there are no more. For now.
Why not now?
Real estate brokers and developers say there is plenty of land in the Jacksonville area for more 1 million-square-foot speculative warehouses and eventually there will be a need.
Luke Pope, JLL executive managing director, represented landlords VanTrust Real Estate in leasing Imeson Park South and CT Realty at Florida Gateway Logistics Park.
He said that without spec buildings, tenants needing 1 million-square-foot buildings have one option — arrange to develop them, which takes time.
In business, time is money.
But rising interest rates are making spec projects more expensive for developers, who would need to charge higher rents to future tenants.
“VanTrust and CT Realty are delivering the first two buildings of this size on spec and both are preleased,” Pope said.
“It is difficult to get new projects out of the ground due to the current lending environment, so more 1,000,000-square-foot specs may not be something we see immediately.”
Mark Scott, partner with Foundry Commercial – Jacksonville, said the decision to build a 1 million-square-foot project on spec is “entirely market driven.”
“The developers of the two recently leased 1 million-square-foot buildings correctly calculated the market would support their projects,” Scott said.
“Does that mean more should be built? Not necessarily given current capital markets constraints as well as other factors including user demand.”
CBRE First Vice President Ben Stewart said the two 1 million-square-foot centers by VanTrust and CT Realty were “essentially preleased before construction was completed.”
“We are not seeing a lot of excess demand for buildings of that size in the Jacksonville market,” Stewart said.
“Construction pricing and interest rates have risen, which has made underwriting these facilities more challenging. The lease rates needed to justify these investments will need to be higher than the current facilities,” Stewart said.
CBRE Associate Kyle Fisher said demand for buildings that size has been subdued across the country compared with 2022.
“The success of leasing out the separate million-square-foot speculative projects in Jacksonville emphasizes unique local market dynamics,” Fisher said.
He said Jacksonville’s available labor supply along with being near Interstates 10, 95 and 75 for efficient regional distribution seems to have driven tenant interest.
“However, the current rents for spaces of this magnitude have not yet risen to a level that would completely justify the potential risks involved in beginning a new speculative project in Q3 2023,” Fisher said.
He said local demand, rental trends and other factors would determine if a 2024 project is viable.
John Richardson, president and principal of Newmark Phoenix Realty Group, said with the “robust industrial demand” in Northeast Florida he thinks another 1 million-square-foot spec building would lease before it is completed.
“However with the current interest rate hikes and inventories stabilizing, I’m not sure we will see another 1 million-square-foot speculative building in the near future,” Richardson said.
Tyler Newman, executive director at Cushman & Wakefield, said there are tentative plans to build a few 1 million-square-foot spec buildings, but not immediately.
“Given the current economic climate, I suspect we will not see any 1,000,000-square-foot specs get started until next year,” Newman said.
Jason Purdy, vice president and industrial specialist at NAI Hallmark, anticipates one or two spec buildings of that size for the north and west sides within 24 months.
“Jacksonville is still a destination market for companies to set up a distribution presence and often, the company cannot wait through a build-to-suit time frame,” he said.
That creates opportunity for developers to build on spec.
Marc Munago, Jacksonville executive vice president of VanTrust Real Estate, is not aware of any specific spec buildings of 1 million square feet that are starting.
And he doesn’t see a need for any at the moment.
“I would not think there will be any 1 million-square-foot spec buildings in Jax in the near term,” he said by email.
“It has become increasingly more difficult to get spec buildings going these days given the economic challenges we are facing.”
There is still industrial demand, he said, “but likely not what it was over the last few years.”
Scott with Foundry Commercial contends that Jacksonville is well suited for a large center because of its regional reach.
“The potential for more 1 million-square-foot spec buildings is there,” he said.
Even with the two leased, he said, “it is still a bold move to build a 1 million-square-foot spec building.”
Spec development isn’t inexpensive and the completed projects represent significant investment.
For example, the Project Crystal project is $61 million for build-out and equipment on top of the $51.8 milion construction cost.
Colliers Senior Vice President Guy Preston and associate Seda Preston represented Project Crystal.
Guy Preston said the company, which he is not authorized to identify, was checking out the Imeson Park South property for a smaller building when they saw work beginning on the 1 million-square-foot spec warehouse.
The company then decided it had “something else we want to do.”
Preston said the client was looking for two years and during that time, the project needs doubled in size.
Without that spec building, “it wouldn’t have happened,” Preston said.
Preston said Jacksonville also has the distinction of having the first two 1 million-square-foot spec buildings to be leased in the state.
He also sees the need for more.
“We’re definitely, in my opinion, back to where we need another 1 million-square-foot spec,” Preston said.
“There is activity floating that without it, we are not going to catch it.”
Where could one be built?
There’s plenty of space for million-square-foot buildings.
The Wayfair and three Amazon buildings are in West, North and Northwest Jacksonville, where the bulk of industrial space has been developed and continues to be built.
Peter Anderson, Pattillo Industrial Real Estate vice president of new investments, said Jacksonville and North Florida have lots of land.
He said 1 million-square-foot buildings could be constructed in Westlake Industrial Park in West Jacksonville; Cecil Commerce Center in West Jacksonville; WesJax Trade Center in West Jacksonville; Nassau Tradeplex in Nassau County; and Benderson Development Co.’s land in North Jacksonville, “to name a few locations.”
He also said Pattillo has a “big empty site just waiting for a 1,000,000-square-foot building” at NorthPoint Industrial Park.
And the demand will continue.
“The average size of industrial buildings has increased across the country and globe. Provided consumers continue to demand more products the warehouses and manufacturing buildings will get constructed,” Anderson said.
Stewart at CBRE said when and where one is built “remains to be seen.”
“It will take a group with a deep understanding of market fundamentals combined with having the financial backing to pull it off,” he said.
The sweet spots
Meanwhile, there is demand in the market for tenants needing from 20,000 to 600,000 square feet, brokers say.
For example, recent tenants include Frida, which makes baby products and is leasing 270,716 square feet in Becknell at Westlake Industrial Park in West Jacksonville; IPEX Inc., which distributes PVC and specialized piping systems, is leasing 300,240 square feet at Florida Gateway Logistics Park in Westside; and fashion retailer Primark will lease 547,200 square feet at Imeson Park South in North Jacksonville.
“Available space inventory is tight so we should have a healthy industrial market for the foreseeable future,” said Anderson with Pattillo.
“The market has settled to a more normal pace of activity,” he said.
Anderson said the increase in the cost of debt and equity is slowing speculative construction, but not killing it.
Stewart at CBRE said the Jacksonville industrial market “has been a bit of an outlier from other markets when looking at larger deals over the past two quarters.”
“While other markets have experienced slower absorption of facilities over 400,000 square feet, every speculative facility over 400,000 square feet has been leased or is close to being leased in Jacksonville,” Stewart said.
Stewart said a record 8 million square feet of industrial space is being delivered in 2023, with only 2 million square feet left that will be available later this year.
“We need spaces larger than 500,000 square feet available for new companies entering the Jacksonville market and wanting to set up major distribution centers alongside existing companies who are also looking to expand,” Stewart said.
“Currently, companies would have to consider a build-to-suit space, which can take 12 to 18 months to deliver. Meanwhile, a company’s timeline to meet these requirements is often short, somewhere in the range of six to eight months, which may result in that company having to look at other markets like Savannah or Central Florida,” Stewart said.
Stewart said most of the leasing volume in the market is 100,000 to 300,000 square feet and that most of the speculative facilities built in the past few years were built specifically to meet that demand.
Richardson at Newmark Phoenix Realty Group said that from the bulk distribution side, buildings from 200,000 to 400,000 square feet seem to have more activity than those larger than 500,000 square feet.
Also, smaller buildings that can accommodate tenants from 20,000 to 100,000 square feet are generating the highest rents “and a few more developers seem interested in building spec for those type tenants,” Richardson said.
“There is a real need for space in the 40,000- to 80,000-square-foot range,” Richardson said.
Richardson said the Northeast Florida industrial market is still strong as other areas of the state may have slowed.
“Our vacancy rate is still close to 3%, as the tenant demand is still keeping pace with the new supply,” he said.
Purdy at NAI Hallmark sees a consistent demand for users needing 20,000 to 50,000 square feet and those needing 150,000 to 200,000 square feet.
Pope at JLL said the market is healthy.
“Tenant demand isn’t as strong as it was a year ago but it is still good,” Pope said.
“Every size range has demand but the demand is not as robust as it has been the last few years.”
Newman at Cushman & Wakefield said the next wave of buildings under construction are 185,000 to 600,000 square feet.
He said the average tenant in the market is 172,675 square.
Newman said the market is healthy and vacancy was 3.69% at the end of the second quarter for Class A warehouse space.
“It will be much lower than that by the end of the year and we should see new projects get announced and/or started in the coming months,” Newman said.
“If we don’t have it, we can’t lease it.”