E-commerce leads a roster of supporting players, contributing to its sustained growth.
The industrial market is riding the coattails of explosive growth occurring in the e-commerce sector. But while e-commerce may be grabbing the spotlight and stealing the show, a much bigger supporting cast of industries is helping to power this expansion.
E-commerce certainly deserves top billing for its role in not only fueling demand for space, but for spurring transformative change across the entire supply chain of modern distribution and fulfillment centers. This includes central hub locations that are within easy reach of both workers and the last mile of customer delivery.
E-commerce, distribution, and third-party logistics continue to dominate the national industrial market, accounting for about 25 percent of all leasing activity, according to JLL. However, the lion’s share of activity – the other 75 percent – is widespread across many sectors from medical device manufacturing to food processing.
“As a general take on things, the economy tends to be in a pretty good place, and a lot of businesses are benefiting from that,” says Ryan Severino, chief economist at JLL. GDP has been growing at a rate of 1.5 to 2 percent, and consumer spending remains healthy.
“I usually take the temperature of the confidence level of the principals of the company, and people are more optimistic,” adds Arnold Ng, CCIM, president of Apex Commercial Real Estate in Torrance, Calif. “They are not as resistant to expanding. They are willing to take on more risk, and people are being a little more aggressive in making moves.”
Industrial is outperforming other property types for vacancies and rent growth, and the latest forecast from the Spring 2017 ULI Consensus Forecast remains positive. Industrial vacancies are expected to improve 20 basis points to reach 8 percent by year-end, where it will hold steady in 2018 before climbing slightly to 8.4 percent by the end of 2019. Rent growth for industrial is expected to slow after peaking at 6.6 percent in 2016, but remain above the expected rate of inflation at 4.6 percent in 2017, 3.8 percent in 2018, and 3 percent in 2019, according to the ULI report.
Solid Foundation
Consumer spending is a big piece of the U.S. economy – a lynchpin in the demand for industrial space. It is important to note that despite the explosive growth of e-commerce, nearly 90 percent of all sales are still occurring within brick-and-mortar stores, according to Severino. Regardless of whether consumers are shopping online or in stores, that spending is fueling activity all through the supply chain from manufacturing and imports through distribution and logistics.
“While consumers spend money, there is going to be demand on a whole bunch of different industries,” he adds.
Users looking for industrial space run the gamut from traditional manufacturers to nontraditional players, such as marijuana growers, churches, and trampoline parks. The nontraditional participants often seek to occupy industrial space, which is less expensive than retail, as long as they can pass the conditional use permit hurdles, according to Ng. “In our market, we have seen indoor sports facilities create demand for industrial as well,” he says.
Advanced manufacturing continues to be an important staple for the industrial market. For example, Ohio is home to operations for GE Aviation and auto manufacturers, such as Toyota and Honda. Those manufacturers attract demand from suppliers locating near their big clients.
“Automotive is stable right now, but we have to see what happens to the whole automobile industry during the next 10 years with the self-driving cars movement,” DeFilippo says.
Spurring Growth
Edmonton, Alberta, has a robust industrial market with demand ranging from pet food to pot. Champion Petfoods recently announced a new 400,000-sf facility planned for the western part of Edmonton that will open in 2019.
Ford Canada also announced plans for a new 400,000-sf auto parts distribution center south of Edmonton in 2018, notes Carla M. Voss, CCIM, an associate at RE/MAX Commercial Capital in Edmonton. “As the economy in Alberta has been profoundly affected with the downturn in oil prices in the last three years, this has opened up different opportunities, such as the legalization of marijuana in 2016,” Voss says.
The marijuana industry is igniting demand for space near the Edmonton International Airport. For example, Aurora Sky is building an 800,000-sf owner/user distribution facility to be completed during fourth quarter 2017. The facility is expected to be one of the most advanced production facilities in the world, according to Voss.
The legalization of marijuana is taking off in the U.S. with 26 states that currently have laws broadly legalizing cannabis in some form. Three other states will soon join them after recently passing measures permitting use of medical marijuana. Seven states and the District of Columbia have adopted the most expansive laws, legalizing marijuana for recreational use.
The marijuana companies typically are looking for large industrial warehouses for growing facilities, as well as processing, storage, and distribution. Companies are going into both new and existing facilities, as long as they have the correct zoning and are located the appropriate distance away from schools.
Certain cities are more friendly toward the emerging marijuana industry, and those cities and landlords that are more receptive to its use will attract demand and higher rents from these types of users as early adopters, Ng notes.
U.S. Industrial Volume & Pricing
All closed U.S. sales; cap rates augmented by refinance data.
2017 YTD data through May 2017
| Year | # Props | $ Volume | Avg Cap Rates | Avg PPSF |
|---|---|---|---|---|
| 2001 | 1,659 | 16,354,332,714 | 9.1% | $53 |
| 2002 | 1,634 | 13,398,166,970 | 8.8% | $48 |
| 2003 | 1,801 | 15,995,405,859 | 8.6% | $49 |
| 2004 | 2,631 | 25,214,317,846 | 8.0% | $56 |
| 2005 | 5,285 | 49,754,205,198 | 7.6% | $60 |
| 2006 | 5,564 | 52,457,053,562 | 7.1% | $67 |
| 2007 | 5,757 | 60,881,884,484 | 6.8% | $70 |
| 2008 | 3,112 | 26,222,292,662 | 7.5% | $66 |
| 2009 | 1,376 | 10,324,862,181 | 8.2% | $55 |
| 2010 | 2,382 | 21,222,639,760 | 8.3% | $53 |
| 2011 | 4,123 | 35,251,524,420 | 7.8% | $55 |
| 2012 | 4,142 | 37,466,592,214 | 7.5% | $59 |
| 2013 | 4,564 | 46,690,966,912 | 7.5% | $63 |
| 2014 | 5,587 | 50,534,342,898 | 7.1% | $68 |
| 2015 | 7,544 | 78,301,973,152 | 6.8% | $74 |
| 2016 | 5,823 | 60,064,781,120 | 6.8% | $78 |
| 2017 (thru May) | 2,175 | 22,527,963,315 | 6.9% | $83 |
Source: Real Capital Analytics, 2017
Top 10 Markets for Warehouse Space Under Construction
| Under Construction |
Existing Space Availability Rate |
||
|---|---|---|---|
| Market | Space (sf) |
Precommitted |
|
| Inland Empire, Calif. | 24,442,934 | 27.0% | 6.8% |
| Dallas/Ft. Worth | 14,687,355 | 21.5% | 9.1% |
| Atlanta | 14,174,507 | 39.4% | 8.8% |
| Pennsylvania I-78/I-81 Corridor | 13,482,425 | 32.8% | 8.7% |
| Chicago | 10,393,149 | 51.3% | 8.4% |
| New Jersey | 9,169,747 | 43.3% | 6.4% |
| Kansas City, Mo. | 7,183,755 | 54.0% | 9.4% |
| Los Angeles | 5,796,992 | 26.9% | 3.7% |
| Indianapolis | 4,168,823 | 50.6% | 8.5% |
| Denver | 3,233,676 | 70.3% | 9.3% |
| Total | 106,733,363 | 36.4% | – |
Source: CBRE Research, 2017
New Supply
Construction ramped up during the last few years, and steady demand for development continues in the pipeline, especially from e-commerce, third-party logistics, and retail users. Almost half of the 167 msf of U.S. warehouse space under construction in the first quarter – 72 msf – is already precommitted to tenants, according to a CBRE report.
The top three markets for warehouse space under construction include:
- Inland Empire, Calif., at 24.4 msf
- Dallas/Fort Worth at 14.7 msf
- Atlanta at 14.2 msf
Construction of speculative distribution facilities in Ohio markets has increased in each of the past three years and will approach record levels in 2017. “Spec development has increased exponentially just trying to keep up with the demand,” DeFilippo says.
Cincinnati has close to 2.5 msf of new space coming online in the second and third quarters, with no preleasing. However, demand is still outpacing supply and continuing to push rental rates higher.
Investors also have an appetite to redevelop or repurpose obsolete buildings to create industrial facilities that are closer to the population for last-mile fulfillment. Much discussion has centered on whether vacant big-box retail stores, such as a Kmart or Sears, could be repurposed as industrial distribution and fulfillment centers.
Zoning and land costs are two potential stumbling blocks. However, there are cases where those conversions are moving forward successfully. For example, a shuttered Kmart was demolished in Cincinnati and replaced by a build-to-suit industrial building for a local supplier to the trucking industry.
In Cleveland, an Atlanta-based developer is looking at a vacant regional mall site on which to construct a 600,000- to 700,000-sf distribution facility for an undisclosed national company, DeFilippo notes.
Infill locations are attractive due to the high demand and barriers to entry for new competition. Historically, very few people worked in industrial warehouse facilities. Today, many individuals operate in these fulfillment and distribution centers, and they want to work in facilities that are close to amenities and are not parked out in a greenfield in the middle of nowhere.
“The employers, including Amazon, are going to look at space much the way an office employer does,” says Scott Crowe, chief investment strategist and portfolio manager at CenterSquare Investment Management in New York City. “How is this space going to help me attract employees, hire people, and keep them happy?”
For example, CenterSquare recently acquired a former Quaker Oats facility just outside of Harrisburg, Pa. The Class A industrial market is situated on all of the major road arteries, which make it very easy to reach the entire northeast within a one-day drive, Crowe notes. CenterSquare plans to completely gut the facility and raise ceiling heights.
“The way to avoid competition is to add value by accessing assets that need some form of transformation, active management, and capital investment,” Crowe says.
Although the pace of growth may be slowing, it appears that the stage is set for more expansion ahead, with developers, investors, and space users all remaining relatively active.
“I think we are years away from the end of the cycle,” Crowe adds. “And I think we are going to be surprised about how long the cycle lasts, because it has been a very muted recovery, and risk aversion due to the global financial crisis has forced a lot of discipline into markets in general, including commercial real estate.”
By: Beth Mattson-Teig (CCIM)
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