Supply of industrial real estate struggling to keep up

The demand for industrial space has been extraordinarily strong throughout this recent cycle and is expected to stay at high levels throughout this year and into mid-2021, according to a report by NAIOP. Originally, a larger decline was predicted, but the forecast was updated largely due to a healthy economy, trade tensions easing and unemployment staying at overall low levels.

“We still have a situation in the US, where demand for space is outstripping supply, so we have a very nicely balanced industrial market in the US at the moment,” said Dr. Tim Savage, clinical assistant professor of real estate at the New York University Shack Institute of Real Estate.

In fact, industrial transaction volumes in the US exceeded $100 billion in 2019 for the first time in sector history, according to JLL Research. The NAIOP report listed several factors that contribute to the strong demand, including the continued rise of e-commerce. Online retail in the US has grown approximately 1% every year, from 4% in 2010 to 11% in 2019, according to the Federal Reserve. Mastercard also estimated a 3.4% increase in holiday sales last year compared to 2018, with e-commerce sales increasing by almost 19%. This growth has had a direct impact on the need for industrial space.

“We’re seeing a demand for fulfillment centres, so large spaces that lie just outside of dense, urban populations like New York and Boston specifically, combined with locations within the urban cluster that allow for last-mile distribution to occur in a timely fashion,” said Savage. 

When looking at retail, Savage says it’s a different beast when compared to other commercial real estate segments, like office space, because of the constant pressures from consumers for advancement in retail. E-commerce is just the next step in the ongoing evolution of retail. It’s a more convenient mechanism for people who live in urban clusters and suburban areas, especially as e-commerce giants like Amazon are nearing the point of being able to offer same-day delivery.

“Amazon is just a more efficient, electronic version of the Sears catalog and that convenience has a lot of value for consumers,” he said. While there are some types of retail that may be more difficult to disrupt like fresh produce or some other grocery items, US consumers have expressed a clear preference for online shopping.

One noteworthy concept is the move back to traditional brick-and-mortar spaces by online brands. Amazon recently made headlines after opening the doors to its first full-size cashier-less grocery store in Seattle. The online giant adds this store to its other smaller Amazon Go locations, which are more like convenient stores.

“It’s an interesting development to see online retail move back into a traditional space but using modern technology that not only allows for cashier-free transactions, but also cash-free, as people pay using their mobile devices. The scalability of something like this could be substantial,” said Savage. While there may be some return of demand for physical stores, Savage said it’s likely going to be in areas with high foot traffic, simply because e-commerce is just a more economical and efficient way to distribute goods.

With the recent economic fallout from the COVID-19 (coronavirus) outbreak, it’s too early to tell what the impact will be on the commercial real estate segment. This NAIOP report was written without considering the influence it may have.

“The situation is extremely fluid. We use statistical algorithms for forecasting and so from that perspective, it’s difficult to take into account something as uncertain as coronavirus.”