Industrial Space for Lease Remains in Hot Demand
Despite the extraordinary challenges of 2020 including the global pandemic, the election and the economic uncertainty that came from both, industrial property sector fundamentals are encouraging. According to Statistca Research Department the national vacancy is at near historic lows and the lowest of the commercial asset classes with a 10% vacancy rate. E-commerce continues to be the most significant driver of demand. This demand has surged since the beginning of the pandemic.
Even on smaller industrial assets tracked by the National Association of Realtors (NAR/REALTORS®), as reported in their Commercial Real Estate Trends & Outlook, July 2020 Report, the industrial market is the strongest of the commercial real estate sectors given the expected continued and constant growth in e-commerce based on consumers continued trend toward online shopping and delivery.
Why is Industrial so solid now?
The “Amazon effect” is often credited for the strength of industrial real estate and has become well known terminology. What is the Amazon Effect?Investopedia definesThe “Amazon effect” as the impact created by the online, e-commerce or digital marketplace on the traditional brick and mortar business model due to the change in shopping patterns, customer expectations, and a new competitive landscape. Amazon delivery has become a new normal for a significant portion of American households. The Amazon effect has fundamentally and permanently changed how consumers buy product and their expectations for delivery which is “why wait?”.
The pandemic has also led online grocery to explode as many households who had never before ordered online, now use it regularly. This trend is expected to continue post-pandemic. CBRE estimates that cold storage facilities alone are likely to grow by as much as 100 million square feet by 2025 which is a 47% increase from the current 214 million square feet (NAIOP, The Cold Storage Market is Heating Up, Spring 2020 Issue).
In addition to e-commerce, the pandemic has led to a burst of BOPIS (buy online, pick up in-store) which is also likely to become a well-known acronym as consumers become more familiar with the ease and convenience of this delivery method.
Through our own CoeoSpace database, we have seen significant industrial product get leased in the past 6 months in strong industrial markets including Chicago, Houston & Dallas. The largest industrial markets including Inland Empire, California and Eastern Pennsylvania/Southern New Jersey continue to grow and are completing record new constructions projects.
2020 Year End Projection
2020 year-end absorption is likely to be 200 million square feet with new product delivery at an anticipated all time high and likely to reach just over 100 million square feet based on most major industry players’ research. There is plenty of new construction underway and the demand for well-located, well-built industrial space is currently almost keeping up with this supply. This balance will be important to watch.
2021 Outlook and Beyond
It seems clear that we will continue to see the growth of e-commerce and direct-to-consumer delivery channels for the foreseeable future. As depicted below, JLL projects growth of over 1 billion square feet of industrial space by 2025 as developers and investors are ready and eager to meet the continued demand.
These new construction projects will be state of the art, high tech industrial space that will allow occupants to leverage artificial intelligence, machine learning, robotics, and drones which will allow them to maximize all links in the supply chain.
Industrial commercial real estate is clearly the asset class to watch…
Sources: JLL, CBRE Global, Cushman & Wakefield, NAIOP, Statistca, National Association of Realtors (NAR)
Written By: Sheila Samii Matuscak