The growth of industrial real estate has no end in sight

 (Photo: Pexels)

(Photo: Pexels)

A country’s economic growth cycle usually is a sine curve, oscillating between contraction and expansion every seven or eight years. But in the U.S., the current expansion cycle has largely gone past the usual length, being in a state of expansion from 2009 which looks to have no signs of waning.

This growth cycle directly impacts the industrial real estate market, which has constantly been on the rise as businesses struggle to find land against steep prices around densely populated regions. A report published by CBRE last week, detailed the reasons for the prolonging growth phase and how it can structure the market in the years to come.

The growth of e-commerce over the last decade has a lot to do with the bullish industrial real estate market. The statistics are telling - the percentage of e-commerce sales to the total U.S. retail sales stood at 4.2% in the first quarter of 2010 which has ballooned to 9.1% by the last quarter of 2017. E-commerce sales accounted for $39 billion in the Q1 of 2010, which grew to over $115 billion by the end of 2017. Amazon is growing faster than ever, and major retailers like Walmart and Target have made strides in improving their e-commerce market. If the extrapolation on the rate of growth of e-commerce is to be believed, this is just the beginning of a consumer revolution.

“There are few historical precedents for e-commerce’s effect on the industrial real estate market,” said David Egan, CBRE Global Head of Industrial & Logistics Research. “The market still is establishing its new baseline, though most evidence indicates that expectations have reset at higher levels for the foreseeable future.”

Competition between the e-commerce and retail giants is pushing supply chains to become more efficient which is increasingly putting the last-mile delivery process in the limelight. Since last-mile delivery is completely dependant on the positioning of warehouses, it is critical for companies to develop spaces near densely populated areas. But land availability near populated regions is constrained, and the prices are absurdly high, causing businesses to ever be on the lookout for a middle-ground compromise.  

The report also comes up with an economic perspective to the growth of industrial real estate. Warehouses, distribution centers, and manufacturing units tend to be slower on the uptake while the economy grows, which causes dissonance in the growth curve. The industrial market’s recovery from the 2008 depression was not visible until 2011, which could explain the continuing expansion phase.

Considering the different situations in markets across the U.S., it is evident that some markets are well ahead of the curve while some lag behind and probably can be expected to grow continuously over the next decade. For instance, markets like Charlotte, Nashville, Phoenix, Jacksonville, Atlanta, Charleston, Miami, Detroit, and Sacramento are at the furious expansion mode, where fast-rising rents coupled with ever-shrinking vacant spaces is leading to real estate markets struggling to meet demand. On the other end, markets of Minneapolis, Portland, San Diego, Houston, and the SF Peninsula are cooling down while vacant spaces and subsequently their rents are nearing stability over constant supply additions.

In the near future, it could be expected that the markets that have attained a maturation at industrial real estate prices - albeit a minuscule percentage - to start their contraction cycle, but the markets that are at the peak of their growth now still have a few more years ahead of them before they look at contraction. Then again, contraction as we know from the previous cycles, could never set in completely. The burgeoning e-commerce year-on-year growth, which as per CBRE has created a “fundamental shift in goods fulfillment from retail stores to warehouses,” could be the most decisive factor in dictating real estate growth moving forward.

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