Industrial Fulfillment Fueled by E-Commerce
By Scott Word, Principal, Industrial Investments
Year-over-year e-commerce growth surged to 44.5% in Q2 from 14.8% in Q1.
This has put pressure on retailers, wholesalers and third-party logistics companies (3PLs) to reach consumers while lowering transportation costs.
Demand for space will be driven by e-commerce
Demand for space in the near term will be driven by e-commerce. CBRE Research has found that $1 billion in incremental e-commerce sales generates 1.25 million sq. ft. of warehouse space demand.
Therefore, net absorption is projected to reach nearly 250 million sq. ft. in 2021, more than the previous five-year annual average of 211 million sq. ft.
This heightened demand for space is driven by the requirement to store more inventory closer to the consumer to cater for various types of shopping such as: in-store, click and collect, and deliveries. This means more capacity at the last mile, within densely populated pockets, and also at well-positioned transportation nodes and intersections outside of urban areas.
JLL has forecast that re-shoring will bring big players back to the market, taking up far larger sites (from 500,000 square feet to one million) than was common pre-COVID. The brokerage division of the property group predicts another one billion square feet of industrial space by 2025.
Growth by Geography
Focus on Southwest and Southeast U.S.
The Southwest and Southeast U.S. will have the highest rates of population growth over the next five years. In the Southwest, the Inland Empire will remain the dominant big-box industrial market.
Demand for Infill Warehouse Space
There is strong demand for infill warehouse space in urban cores, but land constraints and high costs have limited new development. Adaptive reuse of retail buildings for industrial occupiers is expected to accelerate in 2021/22.
Most Opportunity in Texas
Texas will provide the most opportunities for investors and occupiers with forecast population growth of 9% over the next five years, largely benefiting the Dallas-Fort Worth, Houston and San Antonio (I-35 Corridor) industrial markets. Meanwhile, El Paso and McAllen will benefit from its border location with Mexico and the recently enacted United States-Mexico-Canada Agreement (USMCA), which should increase its manufacturing and distribution base. Industrial asking rents in El Paso are forecast to increase by 28.5% over the next five years, according to CBRE Econometric Advisors.
Phoenix, Las Vegas, Denver, Salt Lake City and Reno also are posting robust industrial fundamentals and development because of their proximity to burgeoning populations.
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Core Industrial Portfolios
Many core industrial portfolios are institutionally owned, so it is difficult for other types of investors to expand into this segment of the national inventory.
They will look for opportunities in two other segments:
- Modern Class A buildings in emerging markets near logistics hubs and growing population centers, including Salt Lake City, Greenville-Spartanburg, Phoenix, Las Vegas, El Paso and Florida’s I-4 Corridor.
- Class B and C light-industrial buildings in urban markets with below-average vacancy rates, including Northern and Southern California, Chicago, the New York Tri-State Area and Miami.
Taller, more environmentally conscious and tech-centric buildings will be the norm.
Occupiers will demand more skylights and renewable energy sources. Other sustainable features will provide water savings, recycling capabilities and eventually charging units for electric trucks.
The next 5-10 years and beyond will see a growing demand for green warehouses.
This will include new zero-carbon buildings, as major companies make commitments on carbon emissions and setting out science-based targets. Buildings with energy monitoring and management systems and solar paneling will be sought-after. For example, e-vehicle charging will be an expected amenity in the future, which directly impacts the size of a site’s parking. E-trucks and forklifts, with automated vehicles.
Total e-commerce demand will be the source of 36% of all industrial user demand in 2021.
- Total US industrial demand is estimated at 540 MSF
- Northern California - 28 MSF
- Southern California - 64 MSF
- Mountain - 28 MSF
- Southwest (Texas, OK) - 56 MSF
Demand will be concentrated in and adjacent to Major Logistics Hubs.
Major fulfillment operators like Amazon are evaluating a “wagon wheel” strategy to remove their reliance on UPS and USPS for deliveries to rural areas by leasing smaller facilities in the rural markets, and handling the last mile delivery in the rural areas themselves.
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