The industrial property market is forecast to extend its streak of outperforming other nonresidential sectors over the next six months, fueled by strong investment and leasing demand.
A push by retailers and logistics firms to meet increasing consumer demand for same-day delivery is driving those companies toward properties that are more expensive, though closer to population centers. That has investors bidding up prices for those sites.
“Industrial is unbelievably strong right now,” said Rene Circ, CoStar’s director of U.S. research for industrial real estate. “And industrial is going to be the darling of the capital markets.”
Consumers have shifted from focusing solely on price to wanting more convenience as roughly 90 percent of Americans have gained access to same-day or next-day delivery through internet retailer Amazon. This is why Amazon’s growth has steadily outpaced the average overall ecommerce gains of about 15 percent annually since 2010, at times doubling that expansion rate, according to commercial real estate provider Cushman & Wakefield.
For suppliers of goods, that means industrial properties are now revenue centers, leading operators to move ever closer to urban centers and boosting demand for these properties, said Jason Tolliver, vice president and head of industrial research for the Americas at Cushman & Wakefield.
Through the first quarter of this year, industrial property sales ran 1 percent ahead of the same time a year earlier, while office sales slid 9 percent and retail fell 23 percent, according to CoStar data. Industrial rents were up 4.5 percent for combined industrial and office properties and 6.2 percent for manufacturing and distribution sites, while offices climbed a slimmer 1.8 percent. Those trends held through the second quarter, according to CoStar’s preliminary data.
That industrial growth is causing anxiety because costs of operating those centers are increasing as tight labor markets compete for warehouse and transportation personnel in urban areas, Tolliver said.
“We see developers beginning to identify their properties as labor-friendly,” he said. “Developers are offering amenities such as day care centers, food trucks, walking and fitness trails.”
Distribution centers closer to urban areas also present unique challenges navigating crowded city streets and being able to maintain just-in-time delivery.
While all eyes are on where Amazon will locate a second massive U.S. headquarters, a decision expected this year, the online retailer is quietly making location decisions weekly that are affecting industrial markets.
Amazon is launching a new offering that will help small entrepreneurs build their own companies delivering Amazon packages. Amazon will take an active role in helping interested entrepreneurs start, set up, equip and manage their own delivery business.
Over time, Amazon will empower hundreds of new, small business owners to hire tens of thousands of U.S. delivery drivers. The decision on where they will locate those businesses are theirs, Amazon said. However, it is expected these small businesses will move into and serve closer-in neighborhoods.
“Customer demand is higher than ever and we have a need to build more capacity,” Dave Clark, Amazon’s senior vice president of worldwide operations, said in making the announcement.
E-commerce is revitalizing demand for vacant, urban-core warehouses, says Walter Byrd, senior managing director at commercial real estate services provider Transwestern. The greatest expense in distribution operation is transportation, accounting for more than half the average supply chain budget. Curtailing miles from delivery routes and eliminating time lost to traffic congestion increases overall profitability, particularly if these improvements are incorporated in a delivery’s “last mile,” historically, the most inefficient leg of the delivery journey.
It is hard to ignore the other behemoth shoving the industrial real estate market into the second half of the year: private equity firm Blackstone Group. Coming up Aug. 9, Gramercy Property Trust shareholders will vote on the commercial real estate investment trust’s proposed merger with Blackstone for $7.6 billion.
Blackstone accounted for one-fifth of all the U.S. industrial property purchases of more than $10 million in the first half of the year, according to CoStar data. If approved, the merger could spur the spinoff of a portion of Gramercy’s portfolio. Blackstone undertook negotiations with Gramercy with the understanding it would be marketing certain properties even before the closing of a deal, according a Gramercy filing with the Securities & Exchange Commission.