Trends in Industrial Real Estate Demand: What’s Next for the Industrial Sector
Industrial real estate remains largely unscathed by the aftermath of the global pandemic, according to 2021 Q1 reports from CBRE. And, for most corporate real estate professionals, this probably doesn’t come as much of a shock. While many office space tenants are opting to delay decisions through Q2 as they iron out their reopening plans, the explosion in e-commerce demand during COVID-19 is continuing to drive substantial growth across the industrial sector.
This is good news for most of us, but it’s also left many CRE leaders wondering whether leasing volumes will plateau or drop off and what the future holds for industrial real estate in general.
Here’s what you need to know:
The future of the industrial sector appears strong
First, let me immediately put your mind at ease. Although uncertainty continues to plague other industries, the future still looks bright for industrial real estate.
While e-commerce is the primary driving force behind this boon, we also see tremendous growth in manufacturing to keep up with the pandemic-era demand for certain goods — not to mention an increased need for logistical hubs throughout the country.
Additionally, we’ve seen a spike in demand for data center space. If online shopping has changed industrial real estate’s footprint, data centers, a necessary component of e-commerce, are also a driving force behind the trend. These spaces are dedicated to order processing, shipping, customer interactions, and supply chain logistics. These buildings also house the technology that is at the center of e-commerce. And, of course, support online streaming and gaming, which also increased during COVID-19 lockdowns.
But not all of the industrial sector’s growth is due to the pandemic. In an article for Supply Chain Management Review, CBRE Senior Research Director James Breeze noted industrial real estate hit 44 consecutive quarters of positive net absorption in Q1 2021. Breeze also pointed out Q4 of 2020 and Q1 of 2021 are among the strongest six-month periods of all time. Rental rates, construction expansion, demand, and pre-leasing are all at an all-time high.
E-commerce is evolving and continuing to lead the way
Before the rise of e-commerce and the global pandemic, conventional distribution centers acted as storage for wholesale orders and shipments of goods to individual stores in various regions. In the early days of e-commerce, many traditional retailers commissioned a small portion of their distribution centers for use as online order fulfillment areas. Other retailers simply outsourced the process to a third party.
As demand grew, these traditional retailers sought to open their own fulfillment and distribution centers to manage their online orders. With the emerging e-commerce approach to retail, these centers will be in high demand and continue to drive the rise of the industrial sector.
Now, in the wake of the pandemic — even as the promise of a return to business as usual hovers over much of the country — consumers are flocking to e-commerce for more of their goods.
So, it’s no surprise that forecasts appear solid — especially in manufacturing and distribution centers necessary for just-in-time deliveries. For example, Amazon is repurposing newly vacant department store spaces and transforming them into fulfillment centers. Meanwhile, demand for new spaces for e-commerce companies is growing by the day with no sign of slowing.
And as the online shopping experience grows in sophistication, traditional brick-and-mortar retailers are feeling even more pressure to compete, which will likely further increase industrial demand.
Demand will eventually level, but is unlikely to ever drop
Even as e-commerce begins to level and there is an expectation for consumers to back away from their laptops, get out of their homes, and return to traditional brick-and-mortar shopping centers, the need for distribution centers is expected to persist. We don’t anticipate consumers will suddenly stop using retailers such as Amazon, even with brick-and-mortar stores back open for business.
After all, even those who were reluctant to participate in e-commerce before the pandemic eventually discovered the ease and convenience associated with ordering necessities online. (And when time is such a precious commodity, who wants to spend it waiting in line at the store?)
The future demand for distribution hubs, manufacturing, warehousing, and logistics operations ports promises to keep the industrial sector humming. Last-mile destination centers for distribution are also forecasted to grow as the competition among e-commerce merchants increases.
Managing the challenges of the changing market
While industrial sector growth is excellent for the economy and the real estate market in general, it’s also a bit frustrating for those charged with finding suitable space for industrial real estate clients.
As a CRE professional, it’s critical you stay up to date on the industry’s evolving needs. For example, the industrial sector needs square footage, but clients likely also need help strategizing solutions for their space. It’s helpful if you can tell them whether a space is conducive to automation and robotics solutions. Knowledge of transportation is also essential as a fair portion of the cost of operation involves last-mile transit.
In the current environment, finding the right space is challenging. With historic spikes in rent, plus inflation driving up the cost of construction materials, particularly lumber, and the scarcity of available resources, there are lots of hurdles to navigate. And that’s where a creative approach is most beneficial.
By acting as a knowledgeable expert and trusted partner, you can benefit from this boom while also helping your clients meet their needs.