The industrial sector flourished in 2017. Real estate research firm Real Capital Analytics (RCA) noted in a recent report that the industrial sector, seeing gains from rising e-commerce sales and the resulting need for industrial facilities, was the only commercial real estate sector last year that saw an increase in transaction activity from January through November. NREI discussed possible trends to look out for in 2018 with several market observers.
Industrial activity will continue to thrive. There is no indication of a slowdown in this sector for 2018, says Peter Muoio, chief economist at Ten-X, an online real estate marketplace. During the latter part of 2017, new demand drivers, including e-retail warehouse distribution and fulfillment space, cloud computing and facilities for legalized cannabis, supported much of the demand in the segment. However, Muoio expects there to be an increased demand from traditional users of industrial space, such as industrial production companies. “You’re in a sweet spot for 2018 in the industrial segment,” he notes.
Oversupply is creeping up as a concern. Vacancy rates for the sector are the lowest they have been in recent memory, Muoio notes. However, while not an immediate concern, Muoio says he is watching to see if the industrial sector starts to see supply pick up too much. “We are seeing supply pick up, so we’re keeping an eye on that,” he says. While supply does not yet appear to be getting ahead of demand, there has to be a balance, notes Walter Kemmsies, managing director, economist and chief strategist for real estate services firm JLL’s U.S. ports, airports and global infrastructure group. Markets saturated with one type of industrial asset—such as only large distribution centers—can create issues down the line. “Too much of one means too little of another,” Kemmsies says. “[It] becomes a bottleneck.” Staying in tune with local markets helps to anticipate where there will be pockets of oversupply, notes Eric Witmondt, principal of Woodmont Industrial Partners, a Fairfield, N.J.-based firm that focuses on port and intermodal industrial properties in the Eastern United States.
Infrastructure issues won’t disappear. With the proliferation of e-commerce and omni-channel retailers—coupled with a growing economy—there has been investment in distribution centers and warehouses. But as for the transportation infrastructure needed to support them? Not so much, says Kemmsies. Yet with an increase in inventory, there comes an indication that supply chains are less efficient, he says. “Every industrial real estate investor has to monitor that and [ask] how does this resolve? How does this get back on track?” Kemmsies says.
The Midwest holds promise for growth. This region of the U.S. is poised to see benefits related to President Donald Trump’s tax reform and push to keep jobs in the country, as manufacturers may be more willing to return to the region, says Jay Rollins, managing principal and co-founder of JCR Capital, a Denver-based financial firm that provides capital, debt and equity for middle market real estate acquisitions. “We do anticipate that we are going to see better leasing and less disruption in the rent roll in 2018 in the industrial space due to the tax cuts,” he says. Witmondt, of Woodmont Industrial Partners, says opportunities also lie in North and South Jersey, given their proximities to the densely populated New York City and Philadelphia markets. Central Pennsylvania and Atlanta also show promise, given the population growth in those regions, he adds.