The COVID-19 pandemic cast doom and gloom for much of the commercial real estate industry. Commercial offices sat empty for months. Foot traffic dwindled in already-struggling retail spaces. The one bright spot? Industrial real estate.
Even prior to the onset of COVID-19, industrial real estate was a growing sector, due largely to increases in e-commerce sales, buoyed by conglomerates like Amazon.
However, when in-person disease transmission became widespread in early 2020, e-commerce exploded. According to data from IBM’s U.S. Retail Index, the pandemic accelerated the shift from physical stores to digital shopping by roughly five years.
This has manifested in unparalleled demand for warehouses, distribution sites, and fulfillment centers that support same-day/next-day shipping networks. To best capitalize on the boom, industrial property owners and operators should be aware of the current market landscape.
Land: They’re Not Making More of It
It’s hard to find vacant land available for new construction. Compared to their office and retail counterparts, industrial properties require a large footprint with sizable parking lots for delivery trucks to accommodate business operations. Empty lots of this size don’t grow on trees.
Industrial real estate covers a broad range of property types including:
- Light manufacturing facilities
- Heavy manufacturing facilities
- Food manufacturing facilities
- Temperature-controlled facilities used to store and distribute food and beverage products. Cold storage spaces are a hot asset type as demand for fresh, healthy food increases.
- Growing facilities for medical-use and recreational cannabis
- Warehouses, fulfillment centers, sortation centers, and last-mile delivery stations vital for distributing goods to retail stores and businesses and supporting e-commerce operations
Overall, new industrial completions are expected to jump by 29 percent next year, according to CBRE Econometric Advisors. Even so, it’s possible demand will outpace supply.
A Landlord-Friendly Leasing Market
Average industrial property rents in the United States are at record highs, with year-over-year rents increasing at a 5.1 percent rate as of Q2 2021. While during the same period, industrial vacancy rates fell to 4.8 percent, one of the lowest rates recorded.
The same is true for industrial properties still under construction. In the second quarter of 2021, the pre-leasing rate for new industrial spaces reached an all-time high with over 61.3 percent already leased according to JLL.
Some office owners and operators have been forced to offer more flexible leasing terms to fill vacancies. But the strength of the industrial market is propelling industrial property owners to hold firm on standard 10-15 year lease durations.
As online sales soar, demand for professional warehouse workers is also increasing.
Tenant experience has typically been a term specific to commercial offices. But in an already competitive industrial labor market, some industrial properties are now considering amenities that help tenants attract labor by providing a safer, healthier environment.
Industrial tenants are expected to place new demand on more human-centric operations—and will look to property teams for support. For example, basic air conditioning is currently available to only eight percent of warehouse workers, according to another report by JLL.
As COVID-19 lingers, enhanced wellness measures such as air quality systems and natural lighting are expected to play a major role in industrial real estate’s future. Industrial centers will likely follow in commercial offices’ footsteps and introduce amenities like fitness centers and outdoor spaces to help their tenants win the war for talent.
Some experts predict industrial properties will move closer to urban centers to fulfill labor demands, raising interesting questions for the future of industrial real estate.
Industrial Real Estate Sales are Heating Up
Although investments in office and retail spaces remain tepid, investors are showing a huge appetite for industrial real estate sales.
The price of the average industrial property increased over 20.6 percent from $16 million in the first quarter of 2020 to $19.1 million in the first quarter of 2021. And asking rents are at all-time highs.
There are several factors making industrial buildings uniquely appealing to investment firms:
- Buildings are often single-tenant properties with long-term leases, meaning less management stress for property teams, and in frequent renovations.
- Leases are typically triple net, meaning property maintenance is the tenant’s responsibility.
- Industrial leases usually range from five to ten years but can reach up to 25 years—meaning stable income for investors.
Investors eager to join the action are pursuing non-traditional forms of investing. These include buying into an industrial real estate investment trust (REIT) and real estate crowdfunding.
Hot acquisition markets include Southern California, Atlanta, Philadelphia, and Dallas. This is due largely to these states’ high projected population growth, lower taxes, and pro-business state governments.
Spotlight on Sustainability
In 2021, industrial owners and property managers face increasing pressure from investors, consumers, and regulators to reduce carbon footprints.
Supply chain carbon neutrality requires a company to remove the same amount of carbon dioxide from the environment that it emits during the development, production, and distribution of goods and services.
Supply chain activities that support e-commerce generate significant carbon emissions. Consequently, leading corporations are announcing carbon neutrality pledges. Amazon for example, has pledged to be carbon neutral by 2040.
In the industrial real estate sector, this will require investments in high-efficiency roofing and insulation, water conservation, LED lighting, rooftop solar panels, wind turbines, and other renewable power sources.
Industrial Real Estate is a Good Bet
According to one forecast, US growth in e-commerce will necessitate an additional 1.5 billion square feet of industrial space in the next five years.
As a result, the current shifts in investing activity, supply chain, and warehouse space design in industrial real estate are expected to continue.
For guidance on leasing industrial properties, check out the Building Engines space management video: The New Leasing Landscape.