Industrial Real Estate: Why Demand for This Asset Class is Growing

The industrial real estate sector has experienced a significant amount of growth within the past 5 years, with no signs of slowing down. In fact, to accommodate the sector’s rapid growth, Deloitte predicted an additional 510 million square feet of new industrial real estate space would be developed within 2019 and 2020 alone. Additionally, industrial real estate demand is expected to increase by 850 million square feet, to 14.8 billion square feet by 2023.

To add to this growth, in light of recent events, the industrial real estate sector has proven itself able to weather an economic downturn better than other sectors. Thus, a surge of interest from investment groups who were not previously interested is occurring.

Many factors contribute to the aforementioned growth of the industrial real estate sector. These factors include the surge in online grocery delivery, the development of last mile delivery facilities, and an increased demand for warehouse space and labor. Read ahead to learn how they are impacting this sector.

 

Surge in Online Grocery Delivery

By 2023, online grocery penetration is expected to increase from 2% to about 15% to 20%. In preparation for this increasing demand, the development of fulfillment centers is becoming a viable solution to ensure that the surge in online grocery delivery does not negatively impact productivity.

As the number of consumers participating in online grocery shopping increases, it is inevitable that a greater percentage of fulfillment will have to come from warehouses to keep up with demand. CBRE predicts that more grocers will need to shift cold-storage operations from their stores to free-standing, refrigerated facilities to save time and money while staying on top of order fulfillment.

 

Development of Last Mile Delivery Facilities

According to JLL’s Urban Infill report, the annual total of e-commerce deliveries has more than tripled over the past 5 years. On the other hand, the development of new urban industrial infill remains relatively flat. In an effort to supplement the lack of ongoing industrial development, commercial real estate properties, such as vacant big-box retail and office buildings, are commonly being repositioned as last mile fulfillment centers.

Last mile distribution space serves as a hub for goods that allows items to be delivered to the end user as fast as possible. The need for increased delivery speed has skyrocketed, stirring the demand for last mile industrial inventory distribution space.

Today, extremely tight vacancies have caused the development of last-mile facilities in urban markets with larger populations to generate higher rents than traditional distribution centers in more suburban areas. As a result, investors are expanding their search for last-mile industrial product to secondary and tertiary markets from their previous focus on established locations near large population centers.

 

Increased Demand for Warehouse Space and Labor

As of 2018, demand for manufacturing space in the United States has consistently outpaced that of the available supply. This demand is driven by the impact of e-commerce on the supply chain. Today’s growing demand for warehouse space can also be attributed to recent market shifts. According to research from CBRE, the disruption in the supply chain will create demand for 400 million to 500 million square feet of industrial space.

As the demand for warehouse space increases, so will the need for skilled talent. In March 2019, a total of 345,000 job openings in transportation, warehousing, and utilities was reported. And projections from CBRE reported that, in 2018 and 2019, an additional 226,000 warehouse workers needed to be hired just to keep pace with demand.

 

 

The industrial real estate market has consistently been one of the top performing industries for CRE over the past few years and will likely continue to be a leader for commercial investments. With an increase in online orders, demand for warehouse space and rapid deliveries will continue to grow. If behavioral changes continue to affect the long-term supply and demand for industrial real estate, there could be big opportunities for real estate investors and developers in this sector.

 

You may also be interested in reading 3 Factors Impacting the Supply and Demand of Fulfillment Centers.