What is driving record demand for industrial real estate

The global pandemic has accelerated the growth of e-commerce as lockdowns and security issues have prompted growing numbers of consumers around the world to shop online.

As a result, several years of online sales growth have condensed into 2020 alone, driving a global increase in industrial leasing as logistics become critical for retailers. Changes in population densities, changing consumer expectations and rising transportation costs have all played a role in this rise in demand for industrial property. But it is the need for speed that will shatter CRE’s industrial pricing.

2020 – A banner year for the industry
Across Asia-Pacific, strong leases and tight market conditions resulted in double-digit rental rate increases. Tenant demand was also strong across Europe, with impressive year-over-year gains in rental activity in Eastern Europe (+28%) and Western Europe (+10%). Meanwhile, activity in the Americas hit a new all-time high with more than 680 million square feet (msf) of new rentals.

The US industrial market ended the year strong with net growth of 90 million square feet, the highest quarter on record. More than half of U.S. markets saw year-over-year rental gains, with Southern California’s Inland Empire, Phoenix, Las Vegas and Salt Lake City posting the strongest occupancy growth in the West, while the Pennsylvania I-81 and I-78 distribution corridor, Philadelphia and New Jersey were the strongest markets in the East. In fact, 2020 was a banner year for the Pennsylvania Corridor – with overall net occupancy growth of 23.5 msf, 40% above the previous market record and twice the previous three-year average. In the South, Atlanta, Dallas and Houston were buzzing with activity (collectively growing more than 60 msf), while Chicago, Indianapolis, Kansas City, St. Louis and Cincinnati topped the Midwest rankings.

The US industrial market ended the year strong with net growth of 90 million square feet, the highest quarter on record.

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Shifts in population densities have always been a significant driver of demand for commercial real estate, perhaps even more so in an online world where orders are individually picked, packed and shipped to homes. As millennials age, they are increasingly moving to more suburban areas where a lower cost of living makes it easier to buy a home. Looking ahead, some of the metropolises expected to experience the largest national net migration gains over the next decade are Phoenix, Dallas, Miami, Houston, Las Vegas, Atlanta, Orlando, Tampa, Austin, and Seattle. The expected influx of people into these cities will support demand for industrial real estate within them, as well as in markets that support the delivery of goods with distribution centers.

In the coming years, e-commerce leasing activity and development will focus on regional fulfillment centers that allow retailers to position inventory much closer to end consumers, return centers that help manage reverse logistics costs and recycle returned inventory more quickly, and in urban centers. locations that allow for quick order fulfillment.

The last link is the most expensive
Last mile, finishing touch, and final link are just a few of the many terms used to refer to the final part of an e-commerce supply chain. The final link is the costliest part of the supply chain – often accounting for more than half of total supply chain costs – which is why it will remain a key focus for occupiers. Trying to control delivery costs while simultaneously ensuring speed and predictability is a daunting task.

Changes in population densities have always been a major driver of demand for commercial real estate, perhaps even more so in an online world.
The last link is also one of the most important stages in delivery, as it is the point of contact with consumers whose expectations for service, flexibility, reliability of delivery times and speed are increasing alongside them. to the rise of online shopping. Higher transportation costs caused by rising driver salaries, fuel costs and the number of vans needed for daily deliveries complicate the challenge for retailers to meet consumer expectations. Partly loaded vans, inefficient delivery routes and separate return trips are also contributing factors.

As a general rule, last haul facilities should be within a 30 minute drive of a major city center and as close as possible to the first delivery point. However, not every city will need an urban warehouse in the future. Deliveries to smaller towns and villages can often be efficiently serviced from regional fulfillment centers where storage, picking, sorting and shipping all take place under one roof. Whether or not a last mile is needed must be determined based on each market and each property, but the growing number of retailers who must rely on proximity to consumers will shatter the ceiling on the price of logistics land.

The need for speed will break prices
In the case of the final link, inefficiencies and costs converge around transport, especially in dense urban areas. Although real estate is only a small portion of overall supply chain costs (typically 3-5%), it can have a big impact on cost control elsewhere. The trade-off of spending more on real estate costs through multiple warehouses or distribution centers can be an effective way to reduce transportation distances, thereby reducing transportation costs.

The final link is the most expensive part of the supply chain, often accounting for more than half of total supply chain costs.
Investors and developers are willing to provide more logistical space, but often face a lack of rental price comparisons to adequately secure the purchase of an expensive industrial site near cities. At the same time, demand from retailers and 3PLs for such locations is increasing. Eventually, more developers and investors will accept the risk of buying these sites speculatively at prices that until now have only been affordable to developers in other asset classes. The strong rental growth potential for last tie depots puts logistics in the same revenue bracket as traditional urban land uses. In fact, it is likely that we are now at the start of this wave and that record land prices and logistics rents will become a regular occurrence.

What is the horizon for industrial CRE?
According to the Cushman & Wakefield North American Industrial Forecast, industrial asking rents are expected to reach a new nominal high of $6.97 per square foot by the end of 2022, and growth will be widespread in many markets across all regions. For the eighth consecutive year, net absorption in the United States will exceed 200 msf in 2021; we expect this streak to continue into 2022, further illustrating that industrial real estate is about as close to a “must see” as it is in years to come.


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