Inside an Amazon warehouse facility. Photo via Business Insider.
Industrial real estate will never be a glamorous product type, nor will it see sharp increases in rents like the office sector, which saw rents spike 5 percent last year, according to New York-based research firm Reis Inc. But it remains a sector with improving fundamentals poised for continued growth.
In fact, in all 45 markets tracked by Reis industrial real estate is experiencing positive rent growth.
According to Reis Chief Economist Victor Calanog, demand for warehouse/distribution increased in 2016, with vacancy for this sector down 30 basis points year-over-year and asking and effective rents growing 2.1 percent and 2.2 percent respectively. Demand for flex/research and development (R&D)space also increased, with this subsector's vacancy ending the year at 11.1 percent, falling 70 basis points year-over-year and rents rising 2 percent.
As a result, 54.7 million sq. ft. of new warehouse/distribution space will be delivered in 2017 and 3.6 million sq. ft. of flex/R&D space, according to Reis.
“The bigger the distribution market, the more construction activity,” says Reis Senior Economist Barbara Denham, explaining that for most of these markets, ongoing momentum is driving the construction. “That is, the markets that have enjoyed the highest occupancy growth are the same ones seeing the most new construction. The industrial sector moves in herds such that occupants/landlords/investors see efficiencies in areas that have the most activity.”
The top five markets for warehouse/distribution construction activity in 2017 according to Reis include: Dallas (7.4 million sq. ft.), Chicago (5.5 million sq. ft.), San Bernardo/Riverside, Calif., (4.2 million sq. ft.), Kansas City, Kan., (3.8 million sq. ft.) and Central New Jersey (3.1 million sq. ft.).
In 2018, this is expected to change slightly, with San Bernardino/Riverside, Chicago and Dallas still on top, but construction in Atlanta and Indianapolis to overtake Kansas City and Central New Jersey.
Both ecommerce and international trade are driving development of distribution facilities.
“Distribution markets doing the best will continue to do well and see new construction,” Denham says. “With an uptick in ecommerce, we're seeing more bigger spaces for chocking up big bulks of goods.”
A 2017 CBRE national report noted that technologies continue to reshape the logistics landscape. E-commerce, in particular, is prompting manufacturers, supplies and distributors to adapt their supply chains to meet new service demands.
Amazon is leading the next stage of e-commerce with introduction of same-day deliveries, Denham says. This improvement in service is increasing demand for smaller-scale facilities in urban locations close to customer, she says, noting that Amazon occupies two buildings in Chicago's urban core.
According to the research firm Forrester, U.S. e-commerce sales will rise by 9.3 percent annually over the next five years, to $523 billion.
The CBRE report suggests that this presents a growth opportunity for industrial real estate. Noting that e-commerce requires three times as much space as other warehouse uses, the report points out that every $1 billion in new e-commerce sales requires one billion sq. ft. of additional distribution space. Given the forecast for growth in e-commerce sales, this translates to demand for 40 million sq. ft. of new warehouse space by 2020.
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