Industrial has been one asset class in the commercial real estate industry counted on for continued growth over the last several years. Supply, try as it might, has not been able to catch up with demand that has been fueled by soaring e-commerce activity. However, that may change in the next three years, according to a new report from Deloitte Insights.
It is predicting that demand growth will fall below 1% annually due to increased availability and higher cost of capital.
Cost of Capital
Although the Fed has signalled it is taking a pause with raising interest rates, it is widely expected, including by Deloitte, that there will be an increase in long-term rates as financial markets return to “normal” conditions. Deloitte is predicting that the cost of capital will increase from 5.1% at the end of 2018 to 6.4% by 2023.
New Supply
Deloitte’s model also shows demand growth tapering because the availability rate will likely rise from 7% in 2018 to 10.3% by 2023, largely as new industrial space becomes available. For instance, from 2019 to 2020, an additional 510 million square feet of new industrial real estate space is expected to enter the market, outpacing the 421 million square feet of expected additional demand, Deloitte says.
Other Developments at the Margins
In addition, alternative supply is coming online from a variety of sources, Deloitte says. “Some owners are repurposing vacant or near-vacant nonindustrial real estate spaces to provide more options for renters seeking warehouses in closer proximity to consumers….Retailers are converting stores into smaller showrooms and using the additional space as small warehouses for faster fulfillment [while] owners of some older office buildings are also converting vacant spaces into industrial real estate. The adaptive reuse extends to underutilized parking lots and garages and even erstwhile churches.”
And as with many other CRE asset classes, technology is beginning to have a disintermediating influence on industrial demand with many on-demand warehousing startups, such as Flexe and Flowspace, aggregating underutilized industrial real estate spaces to fulfill seasonal warehousing needs.
What Can Landlords Do
Deloitte has some advice for property owners that may be caught short by these changing fundamentals. Better use of technology is one—owners can now leverage newer data sources and analytics techniques to make smarter location decisions, Deloitte says.
“They could combine information about traditional factors with geocoded data points on regional online sales, consumer lifestyle and behavior, and traffic movement. Then, they could use analytics to understand the impact on the warehouse market and build algorithms to predict alternative future scenarios. Owners need not do this alone and can enlist the help of specialist vendors who offer data and analytics capabilities. For instance, firms like eSite Analytics and Esri use spatial analytics capabilities to provide diverse location-based data sets and predictive analytics capabilities to help with sales forecasting, customer profiling, and ensemble modeling.”
Other suggestions include developing smarter facilities to align with changing tenant needs—such as by providing connectivity within and outside their facilities and making spaces conducive to robot movement—and by improving efficiency within the warehouse to manage rising costs.
Read more about these trends in our slideshow above.
By: Erika Murphy (GlobeSt)
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