Industrial Real Estate Surges but the Best is Yet to Come

Over the last decade, industrial real estate has reached a remarkable level of performance and success.  Rents have risen rapidly, vacancy has plummeted, and demand has outstripped supply.  Investors are enthusiastically rushing into the space, establishing it as one of the most desirable commercial real estate asset classes.  And the enthusiasm shows no sign of waning – both long-time industrial investors as well as newcomers expect the extraordinary industrial expansion to continue into the foreseeable future.

The industrial surge can largely be attributed to growing e-commerce and omnichannel platforms, whose expansion has propelled a thriving demand for distribution and warehouse facilities.

The Hess Collection

The Hess Collection | American Canyon, CA

E-commerce retail sales are growing at double digit rates and currently make up about 10% of total retail sales.  While shoppers buy goods online from a variety of sources, Amazon’s Prime service and One-Click ordering has made it easier to have goods delivered to one’s door than ever before.  There are already over 100 million Amazon Prime members in the U.S., and Amazon transactions alone are expected to comprise roughly 50% of total e-commerce sales by the end of 2018. [1]  By 2021 there are projected to be over 230 million digital shoppers in the U.S., and they will likely buy a higher percentage of goods online than they do today. [2]

The need for industrial real estate is not only driven by the accelerating volume of goods sold online, but also by the way that inventory is handled in warehouses.  According to Prologis, the largest owner of industrial space in the world, products sold online require three times as much warehouse space as those sold in brick-and-mortar stores.  Whereas products that are being delivered to a store can be held on a pallet in bulk and shipped together, products sold online must be individually packaged and shipped to consumers, requiring more floorspace.

Nestle'

Nestle’ | Little Chute, WI

“Last-mile” industrial facilities have recently dominated demand as tenants pivot away from the stereotypical big box industrial mega-centers to smaller, more urban buildings that are better positioned to provide rapid delivery to consumers.  Solid performance and operational upside have attracted significant competition and investor interest to last-mile properties.  In response, construction of small to mid-sized facilities grew to represent over 80% of total industrial development in the first quarter of this year.[3]

This high demand for closer-to-consumer space combined with ever-growing e-commerce channels has created an atmosphere built for strong industrial performance.  Industrial vacancy rates reached an all-time low of 4.8% in the past year, a number that has declined by more than half since 2010.[4]  Growing competition and increased demand for this type of space has turned these historically less attractive assets into some of the most sought-after real estate on the market.  As a result, industrial rent prices and property values are spiking.  These trends are expected to continue along their paths if demand remains strong, and with over 30 consecutive quarters of total new leases outweighing new vacancies and e-commerce growing as it has, demand does not show signs of diminishing anytime soon.[5]

Siemens

Siemens | Elgin, IL

There has always been investor demand for industrial assets, but recent trends have significantly enhanced its appeal as an asset class.  The net lease industrial market is also receiving notable investor interest as its performance parallels that of the overall industrial market.  Investors especially value the long-term leases, contractual rent increases, and predictable cash flows associated with net leases.  Steady rent growth combined with climbing asset values and low cap rates have been the results of substantial (and growing) demand for net lease industrial assets, as evidenced by Blackstone’s recently announced acquisition of Gramercy Property Trust for $7.6 billion.

Overall, industrial real estate is expected to continue its strong performance throughout 2018 and into the coming years.  The sector’s seemingly parallel growth with that of e-commerce is a strong indicator of future health given the thriving predictions for the e-commerce sector.  Industrial REITs also experienced a substantial 2017 total return of 20.6%, outpacing numerous other real estate classes.[6]  Strong returns and a positive outlook have positioned the industrial asset class to continue to attract significant investor interest from both home and abroad.  With positively trending fundamentals and healthy demand, the future of the sector appears bright.

Special thanks to Broadstone intern Zach Lawlor for his contributions to this blog post. 

[1] eMarketer

[2] U.S. Census Bureau; Statista

[3] JLL Research

[4] JLL Research

[5] CBRE

[6] Nareit

About The Author

Danner Hickman
Vice President, Research & Analysis
Danner Hickman joined Broadstone in August 2014 and serves as Vice President, Research. She is responsible for conducting market, industry, and competitive research for Broadstone and its family of investment offerings, and utilizes her background in finance to assist in the company’s debt capital markets activities. Danner analyzes the effects of real estate and macroeconomic trends on the company’s strategy and performance and also plays an active role in product development and special projects.