Industrial Real Estate Trends 2020

Today’s industrial real estate market is experiencing slower demand growth, rising competition and higher cost of capital. Industrial business owners are adjusting to new business models and upgrading their facilities to meet new customer and environmental demands. Industrial real estate trends show an increase in development and investment for the upcoming year, with an explosion in ecommerce sales and demand.

SURGE IN ECOMMERCE ACTIVITY

The industrial market outlook in 2020 shows an explosion in ecommerce activity. Ecommerce spending has risen steadily each year since 2000. Online’s share of total retail shares hit 16% in 2019, up from 14.4% in 2018 and 13.2% in 2017, according to the U.S. Department of Commerce.

Many retailers are adjusting their business strategies to accommodate omnichannel activity. In order to keep up with the demand for product shipments, many companies are modifying their physical facilities or relocating to bigger properties.

INCREASED WAREHOUSE DEMAND

Manufacturing and retail sectors with high consumption drive demand for industrial real estate. These businesses require a large amount of production and distribution space. Ecommerce companies experiencing substantial sales growth demand even more industrial warehouse space for inventory and product return.

GROWING DEMAND FOR IN-HOUSE LOGISTICS

Today’s consumers demand same-day and next-day delivery. Ecommerce companies are being forced to heighten their delivery services to compete with major retailers like Amazon and Walmart. These companies are investing in larger warehouses for in-house logistics and distribution purposes.

SMARTER FACILITIES

Industrial real estate buyers are looking for smarter, technologically advanced facilities. Tenants want to invest in smart technology and automation systems that speed up production processes and lower labor costs. Smart facilities also offer plenty of advantages for businesses, including integrated sensors for building operations, cloud-based analytics, air quality control, temperature monitoring and more.

IMPROVED WAREHOUSE EFFICIENCY

Industrial real estate owners are focusing on improving efficiency to lower maintenance costs and better their green efforts. Business owners are looking for real estate properties designed with efficiency in mind, from storage to energy sourcing. Industrial tenants require advanced Internet connection and connectivity with energy grids for reliable power and the ability to invest in renewable energy sources.

INDUSTRIAL DEVELOPMENT CO-EXISTING WITH RETAIL USES

Industrial real estate trends indicate that we may see an increase in industrial development co-existing with retail uses in the next year. Many companies are adding industrial space onto their retail centers or converting their brick-and-mortar stores into industrial spaces to accommodate ecommerce growth.

Commercial Real Estate Trends And The Call For Creativity

 

The ripple effect of the pandemic’s impact on the commercial real estate (CRE) market is going to have a lasting effect on several market sectors. The remote workforce genie isn’t going back in the bottle, and the reliance on e-commerce and advances in technology for home delivery will continue to disrupt retail. However, there is reason for optimism, but not across all sectors, and there’s still a lot of emperors without clothes out there talking about how everything is going to be just fine. There are thriving CRE sectors, some that need only pivot to adjust to the new normal, and others that will have to completely reinvent themselves.

Multifamily Real Estate: On The Rebound

As a leader in providing property management technology to the apartment industry, my company has seen firsthand how the multifamily real estate market has made a faster recovery (registration required) than expected compared with other real estate sectors. It’s arguable that some markets felt almost no impact at all, and some sectors are actually stronger coming out of the lockdown. Yes, government aid has helped, but the overall market has gotten back on its feet quickly and will continue to do so in 2022. The multifamily market is seeing strong growth with low vacancies, steady rental rates and robust development for next year.

Investors agree: Recent data puts sales volume of market-rate apartments at $46.6 billion in the first half of 2021, which was up by 35% from a year ago. This is on pace with the average growth rate for the past five years. Apartments in secondary markets or further from major cities may benefit from this remote work trend since employees no longer need to be near their physical office location.

Industrial Real Estate: Thriving During Distress

The industrial market saw a huge boost during the pandemic due to the growth in e-commerce, and it looks like this will keep rolling through 2022. Year-over-year e-commerce growth surged to 44.5% in Q2 from 14.8% in Q1, which put pressure on retailers, wholesalers and third-party logistics companies (3PLs) to lower transportation costs. There is still healthy demand for industrial real estate, with 367.8 million square feet (download required) of industrial property under construction. Completions for 2021 are forecasted to top 250 million square feet, slightly above 2019’s total.

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Rent increases were most significant in or adjacent to port areas where there was increased demand due to shipping problems exacerbating supply chain challenges. Vacancies remained steady at 6.1% compared to March 2020. Strong vacancy and rent growth figures show new space has easily been absorbed.

Office Real Estate: In Dire Trouble

Since approximately 50% of U.S. workers worked remotely during the pandemic, flexible work location is no longer a nice-to-have but often a requirement. Businesses have shifted from “always in-person” to a remote workforce, and a vast majority of that workforce likes it. In my opinion, this trend isn’t going anywhere; about 74% of the workforce is planning to permanently be working remotely. This spells a significant reduction in demand for office space. Companies are not re-upping leases and are significantly reducing their square footage, all signals of troubling trends for the CRE market. Not surprisingly, I’ve noticed that CRE owners aren’t talking about this exodus and are telling all who will listen that everyone’s coming back. They may even talk about the need for flex space but not about how flex space will require less space overall.

An overwhelming 72% of companies anticipate modest office space reductions, and 9% of large companies plan to make their office space “significantly smaller” in the next three years. Perhaps some CRE owners are working behind the curtain to stem the tide of companies leaving their buildings or designing new uses, but they have a cash crunch ahead to meet loan payments. Loans to keep CRE businesses afloat can be difficult or impossible to service because a reduction in 20% of topline revenue due to loss of tenants severely impacts a commercial loan, which is typically levered at 75-80%. Cash is only going to get tighter.

Adaptive Re-Use Will Be Key

One of the saving graces for the struggling office and retail real estate markets is the shift to a mixed-use property because apartments in a mixed-use environment command 13.9% higher rents (registration required) than apartments that are not. I believe that this is the most significant opportunity in CRE and where one strong sector can bolster the struggling one.

There are a number of creative ways that CRE real estate executives can reuse a vacant structure to give a neighborhood a boost. Converting unused office space or retail buildings into apartments or nursing care facilities, for example, can make the best use of space and tap into needs in the market. You can add apartments on top of malls or earmark warehouse storage on the back of office spaces. Key factors that determine optimal reuse in a property include location, building structure, cultural significance, sustainability and ROI.

Cities and counties have also put into place adaptive re-use ordinances making permitting easier and construction easier and cheaper. In Los Angeles, for example, where my company is headquartered, CIM Group took advantage of the new adaptive re-use ordinance to renovate a downtown high-rise building.

One component to assist with the success of adaptive repurposing commercial real estate property is technology, which has grown by leaps and bounds over the course of the pandemic. Once considered a “tech-hesitant” industry, it is now embracing everything from automation software for remote property operations to AI that scans for changes in state and local code and compliance regulations. A recent survey showed that 80% of real estate owners and operators claimed new technology was already having a positive impact on their operations.

While some office building owners are awaiting a mass re-entry of people back into offices, others are thinking creatively to re-envision a future that combines the best of both worlds, solving a housing shortage and enlivening office and retail space.

THREE RECENT TRENDS IN INDUSTRIAL REAL ESTATE

COMMERCIAL REAL ESTATE

Three Recent Trends in Industrial Real Estate

Manufacturers and other producers are beginning 2015 with a positive outlook. As a result, they could look to expand their number of properties and space for facilities to prepare for a great performing year. CBRE, a large commercial real estate services firm, projects that new construction for industrial spaces may grow to 141.8 million square feet in 2015 — up from 115.2 million square feet the previous year. 2015 could thus see greater sales and industrial real estate investing.

Here are three major trends in the industrial real estate sector:

1. GROWING GDP, MANUFACTURING SECTOR

Scott Marshall, executive managing director for industrial services for the Americas at CBRE, cited improving gross domestic product and gains in the manufacturing industry as the causes of the great outlook for the industrial sector. The Wall Street Journal recently reported that a survey of economists projects that GDP – an overall measure of economic activity – will rise 3 percent in 2015, a healthy increase.

“There is still plenty of upside for the industrial market, particularly for rental growth,” said Marshall. “Both cyclical demand drivers – GDP growth, expanding manufacturing sector – and structural demand drivers – e-commerce, supply chain evolution–will promote strong user demand across geographies and product types.”

Manufacturers do seem optimistic. In a fourth quarter of 2014 report, the U.S. Bureau of Labor Statistics said that productivity in the manufacturing sector rose 1.3 percent in this period even as productivity dropped in other major segments of the economy. As a result, CBRE believes that such growth in the manufacturing sector could translate to increased industrial real estate demand.

“U.S. manufacturing is on the rise, with production outputs now at all-time highs,” CBRE wrote. “However, these gains are due largely to increases in technology and automation and are not a result of elevated employment or reshoring. The increase in outputs has a stimulative effect on industrial demand in key manufacturing and supply chain markets.” (“Reshoring” is a term used to describe the return of manufacturing jobs that had earlier moved to overseas facilities.)

2. EXPLOSION OF E-COMMERCE ACTIVITY

In addition to Marshall’s remarks, the rise of e-commerce could result in more demand for warehouses, production facilities and other buildings for the production, distribution and shipping of products available online. A report by Prologis said about 30 percent of demand for industrial big-box real estate is connected to the explosion of e-commerce activity, ReJournals reported. Analysts projected e-commerce transactions may surge to $300 billion in 2015 if an estimated 185 million consumers are shopping online in the U.S. With e-commerce growing as a retail sector, companies in that sector may well need to their physical fulfillment facilities in order to keep up with demand for product shipments.

Merchants that operate primarily online may also switch strategies to include omnichannel activity, Multichannel Merchant reported. Amazon, for example, recently said that it was in talks to purchase brick and mortar stores from Radio Shack in order for it to reach out to more customers. Other retailers are also increasingly focusing on omnichannel opportunities to increase both online and in-store sales.

3. IMPROVING STATE OF OIL AND GAS INDUSTRY

Although the oil and gas industry has seen lower revenue from drops in oil prices, the industry is still investing in refining and similar facilities. The Houston Business Journal reported​ that CBRE had indicated that at the end of 2014 the vacancy rate in Houston had dropped to its lowest level since the second quarter of 2003. If those vacancy rates remain low, construction could increase to meet growing demand for industrial space in states with significant oil refining or petroleum product manufacturing sectors.

The Houston Business Journal also reported that, despite reports of energy firms terminating employees because of the fall in oil prices, several companies recently undertook multi-billion ethylene projects, including the $6 billion plant in Baytown, Texas, built by Chevron. As a result of these new facilities, those companies will likely increase hiring to maintain productivity, which will may lead to more demand of industrial real estate in the Houston area. The report also cited Leta Wauson, CBRE industrial research analyst, as saying that the employment gains brought on by new energy projects could offset budget cuts upstream, and that this might have an impact on wholesale and distribution real estate because petrochemical companies need these properties to support their operations.

Additionally, the decrease in oil prices and energy costs could encourage manufacturers and other companies that heavily depend on oil and natural gas for production to further increase their output — which brings us back to the first trend noted here, the improved state of the manufacturing industry generally.

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