Before 2020, the industrial real estate sector lacked the flashiness of other commercial real estate sectors, such as office space or hospitality. Due to various market trends and numerous pandemic-related activities, however, industrial has been the undisputed leader in commercial real estate for more than a year. Climbing rents and low capacity indicate that demand won’t slow any time soon. This article will discuss the driving forces behind the ongoing boom in industrial real estate.
The e-Commerce Challenge
While several different factors will contribute to ongoing growth in industrial real estate demand in 2021 and beyond, the clear winner is e-commerce. In 2020, the 12 biggest online retailers experienced 56.3 percent year-over-year growth in collective sales, accounting for 71.4 percent of the retail sector’s total e-commerce growth for the year. Overall, e-commerce took nearly 22 percent of total U.S. retail sales in 2020, up from 11 percent in 2019.
While brick-and-mortar retailers can distribute inventory among their stores, e-commerce retailers require about three times as much space to hold goods. This is driving a massive uptick in demand for large warehouses and fulfillment centers as retailers and their logistics providers attempt to compensate for the consumer shift to online shopping.
Online grocery sales have also thrown a wrench into traditional industrial real estate expectations. Stay-at-home orders may have initially steered shoppers toward buying their groceries online, but the convenience of curbside pick-up and grocery delivery have proven hard to give up. Online grocery sales rose 43 percent in March 2021 compared to a year earlier, suggesting that digital food purchases are here to stay.
This poses challenges for industrial real estate, where cold storage was already underserved before the COVID-19 pandemic left the cold chain clamoring for more food and vaccine storage facilities. A cold storage warehouse costs roughly twice as much as a standard warehouse to build. Additionally, more than 78 percent of existing cold storage buildings were constructed over 20 years ago, making them poorly suited to meet the digital supply chain demands associated with e-commerce. Despite these challenges, demand for cold storage isn’t going away and the industrial real estate sector will have to deliver solutions to accommodate demand.
Other Demand Drivers for Industrial Real Estate
While e-commerce may be the primary driver of industrial real estate demand, it isn’t the only driver. Here are three other trends contributing to ongoing demand for industrial space:
- Reshoring. In the midst of the pandemic, 69 percent of manufacturers reported interest in bringing production back to North America. The Biden administration’s “Buy American” executive order further incentivized businesses with offshored assets and operations to return them to the United States. As reshoring initiatives move from planning into reality, these businesses will increasingly contribute to industrial real estate demand.
- Other warehouse users. The e-commerce sector isn’t the only user of warehouses. Manufacturers, distributors, brick-and-mortar retailers, logistics providers, hospitals, government agencies, and many other entities rely on warehouses and fulfillment centers to store equipment and inventory. As e-commerce tightens overall capacity, growing businesses in these areas will still need more warehouses to store goods, raw materials, machinery, and more.
- Flexible space. Flexible industrial space can be converted for numerous activities, including inventory storage, manufacturing, product development, data centers, and more. With demand coming from a variety of directions, providers of flexible space will seek to expand their footprints to provide versatile solutions to a changing industrial market.
While it’s easy to focus on e-commerce, it’s essential that industrial real estate stakeholders keep an eye on these other trends as well. Maintaining a broader view of demand will ensure the space needs of other sectors aren’t neglected.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.