Growth in Industrial Real Estate
August 27, 2019
With an accelerated push from the booming e-commerce market, the demand for industrial real estate only continues to grow.
Industrial real estate has been riding the wave of success. We wrote about industrial property’s continued growth nearly a year ago and the word is still good. The majority of supply chain drivers in the U.S. – including consumer spending (both in-store and online), trade, business inventories, and industrial production – are all experiencing record highs. Furthermore, transportation and warehousing jobs and spaces have become larger and fast-growing sectors. After all, the goods need places to be manufactured, stored, and shipped out from.
Over the past five years, the industrial real estate sector — warehouses, distribution centers, flex spaces, and real estate with storage facilities — has experienced healthy growth. Since 2012, year-over-year rent growth has been positive and the availability rate has continued to decline.
But, what’s next? And where is industrial real estate headed as we inch closer to 2020? Let’s break it down.
*The following statistics have been gathered by VPA via the National Council of Real Estate Investment Fiduciaries.
Industrial Real Estate Growth Drivers
Things are looking up. A strong labor market and a healthy household sector have benefited most demand-side metrics within the industrial real estate sector. Total goods, which can be measured by dollar amount, have climbed at nearly all top U.S. distribution hubs.
At the same time, various measures of transit activity are all up, such as commercial air carriers, vessel cargo, intermodal rail, and truck traffic. Major supply chain indicators have also maintained positive momentum.
Consumer spending; trade; business inventories – each of these factors and more have driven the industrial market to levels not seen since the ‘90s. In turn, the same can be said for industrial real estate. The market is surging in ways we haven’t seen in nearly two decades.
Over the past three decades, U.S. warehouse stock has increased by about 75 percent. Nationwide, industrial property now totals 14.0 billion square feet across approximately 258,000 properties.
Over 80 percent of warehouse properties are under 400,000 square feet. And while small-sized buildings are more abundant, the average square footage has continued to climb as well.
Nationwide, the warehouse vacancy rate of about 4.0 percent is near the historical low. Moreover, the vacancy rate for properties under 15,000 square feet is even stronger. At the same time, space rental rates are at an all-time high. Things are definitely looking good for buyers and investors associated with the industrial real estate sector.
Industrial Real Estate Investment Opportunities
Following are a few of the attractive investment opportunities spanning the industrial real estate market.
Metropolitan City Growth
In the coming years, we predict more warehouses will continue to be constructed, expanded, and renovated throughout regions across the U.S. with the fastest population growth (now largely in the South, Southeast, and Southwest).
Online retail sales have transformed consumer expectations and revolutionized how companies transport inventory from business to consumer. Optimizing speed and minimizing cost are more essential than ever. Locally sourced goods (and the local warehouses that such goods are being stored within) have driven much of the recent warehouse redevelopment and leasing activity in and around cities across the nation.
Due to the fact that online consumer shopping and fast shipping and delivery turn-around are only growing, the need for warehouse properties continues to grow even outside of large, metropolitan cities. Therefore, the industrial real estate demand is only growing and allowing widespread opportunity.
Two big growth areas just beginning to take shape are in the e-grocery and e-pharmaceutical markets. A rising share of grocery and pharmacy sales are occurring online. Online grocery sales, now less than five percent of total grocery sales, are predicted to capture 20 percent of total grocery sales by 2025.
Thus, the need for industrial properties catering to these specialized markets are on the rise.
The Rise of AI in Industrial Real Estate
The increase in digitization (e-commerce, which we’ve been touching on throughout this article) and automation has prompted the advanced acceleration of the industrial industry. And even with all the benefits industrial real estate has already witnessed as a result, there are still some new disruptors on the horizon.
One trend that’s poised to rock the world is advanced robotic automation. Warehouses will increasingly reflect AI advancements and are moving straight towards human-less environments. As a result, the way industrial real estate is designed and caters to the market will only continue to evolve.
A Note to Investors
With such a stellar track record, we notice a good amount of industrial real estate investors and buyers willing to buy at record-high prices and low cap rates.
As our outlook for industrial remains bright, we are always here to help our clients. Whether through market analysis of existing space, ground-up construction, or valuing current positions, we assist clients in making the decisions most aligned with their goals. Contact us today to learn more.