Changes In Industrial CRE

April 2, 2018

More than 2,000 years ago, Greek philosopher Heraclitus noted “the only thing that is constant is change.” That statement holds true today, especially within the industrial real estate market.

Finishing the past year at all-time highs, commercial real estate within the industrial segment is gearing up for another great year. Vacancy is near 5 percent, even with more than 240 million square feet of new supply completed in 2017 and another 219 million square feet under construction. Rents are up to $6.29 per square foot, an increase of more than seven percent over 2016 figures, and strong demand is likely to drive rates even higher this year.

And, just as Heraclites proclaimed, changes are still on the horizon.

The industrial segment was the only major property type to boast year-over-year gains, partially due to the boom in e-commerce. As Americans click to buy, they’re also increasing demand for big-box buildings, last-mile distribution centers, industrial flex space and manufacturing facilities. The most recent figures indicate that online purchasing behavior has supported 16 percent year-over-year growth, and now represents ten percent of retail sales not attributed to the automotive market.

What’s more, U.S. businesses are witnessing an increase in domestic operations – a trend known as “reshoring.” Warehouse space will continue to attract more occupiers – and more investors – in the year to come, spurred in part by new tax legislation and a stronger global economy.

Logistics that impact the market are also shifting as the Panama Canal has expanded to allow for more efficient and affordable connection between the east coast and Asia. Since the change, commercial real estate has been in development and expansion mode, and cross-country distribution sources are diversifying.

Yet, in the midst of positive change, new challenges arise within the industrial market as well.

According to CBS News, More than 70 percent of the goods we consume are carried on the nation’s highways, and the truckers connecting manufacturers and suppliers with end users are in short supply. The Bureau of Labor Statistics reports that the average age of a commercial truck driver is 55 years old making an average annual salary of just over $41,000. These statistics, along with the boom in warehouse demand, emphasizes the need for fresh workers. The trucking industry projects that roughly 90,000 new drivers will be needed each year to keep up with demand.

A limited number of qualified warehouse workers may also impact commercial real estate assets, though new technology may pave the way for further industry development. Many warehouses and distribution facilities are transitioning to robotic solutions, moving to automated stacking, picking and shipping procedures. Staff members have declined by 25-50 percent in modern facilities, and the demands business have for real estate assets is changing to address this level of automation.

The requirements for sufficient facility power, connectivity and digital capacity are becoming more complex, which will drive the need for updates, improvements and conversions in aging commercial assets. In positive news, these changes will impact overall layout of a property by increasing building footprints and decreasing the need for employee parking.

Economic factors impacting the industrial segment are also shifting. While many businesses stand to gain from legislative and economic shifts, the direction and impact of new trade policies could create fresh challenges. For instance, the cost and availability of raw materials is likely to shift, creating potential concerns for developers as well as warehouse occupants.

Even amidst new changes and challenges, the industrial market is positioned to move forward. More than $72 billion in industrial assets changed hands in 2017, among the highest annual totals ever, and investors are finding new opportunities in markets across the country. Intelica is positioned to capitalize on these developments, and help our clients navigate the industrial sector confidently.

If you’re ready to become a part of the changing commercial real estate marketplace, reach out to one of the professionals on our team today.