While other commercial real estate (CRE) sectors struggled during the COVID-19 pandemic, industrial real estate barely stumbled at all. As shoppers shifted their purchases online to avoid crowded stores, the ensuing eCommerce boom created a spike in demand for distribution centers and warehouses that continues today, more than a year and a half later. In addition, online grocery purchases and vaccine development initiatives created a rush on cold storage, an oft-neglected subsector of industrial real estate. Companies seeking to shorten their supply chains through reshoring have further strained U.S. industrial capacity.
But how long will it last? That’s the question on everyone’s mind as construction firms try to build and deliver new inventory, prospective tenants desperately seek space in extremely tight markets, and property owners and investors benefit from low vacancy, high utilization, and record prices. Of course, predicting the future is never easy. However, exploring some of the factors contributing to ongoing growth will provide insight into the sector’s expectations over the next several years.
Industrial Real Estate Boom Contributing Factors
Nothing lasts forever, but it seems sure that demand for industrial real estate won’t slow down this year (and probably not next year either). Recent projections show that the United States will need as much as 330 million additional square feet of distribution space by 2025. Given the size of that number, e-commerce alone can carry the sector for some time.
Aside from the boom gripping e-commerce fulfillment, here are some other contributing factors that might extend the upsurge in demand for industrial real estate:
- COVID-19 variants. The Delta variant of COVID-19 recently closed the Meidong Terminal at China’s Ningbo-Zhoushan port, the latest in a long string of global supply chain disruptions caused by the virus. Additionally, the recent spread of the vaccine-resistant Mu variant may lead to more shutdowns of some sort in the U.S. and abroad. These disruptions directly impact industrial real estate capacity as manufacturers, retailers, and various other importers need to hold higher levels of inventory—known as safety stock—to avoid production shutdowns and stockouts.
- Construction slowdowns. Developers have struggled to deliver new industrial properties due to material shortages and rising material costs. The sector also suffers from a severe labor shortage, further contributing to project delays. The aforementioned COVID-19 variants may result in unforeseen delays on building projects as well. Until the construction sector regains the ability to generate new inventory at a normal pace, it will be difficult for the sector to alleviate growing demand.
- Reshoring. The 2021 State of North American Manufacturing report from Thomas revealed that 83% of manufacturers were likely or very likely to reshore. If even half of those respondents follow through on their desire to reshore, that will mean big business for the industrial real estate sector. Reshoring projects don’t happen overnight, so it seems highly likely that the next several years will see incremental increases in industrial real estate demand by onshoring businesses as plans begin to come to fruition.
- Modernization. Yesterday’s warehouses and factories won’t cut it for tomorrow’s industrial tenant. Due to COVID-19, industrial operations want better HVAC systems that can filter airborne contaminants. New advances in robotics and automation equipment require more power than older machinery. The increasing impacts of climate change will demand better flood protection and more sustainable building features. A desire for more advanced facilities will continue to drive demand as manufacturers and logistics operators abandon outdated structures for new locations that can handle their changing needs.
If you’re worried about the bottom falling out of the industrial real estate market in the near future—don’t be. With the above factors and many others contributing to ongoing demand for warehouses, distribution centers, factories, and other industrial properties, industrial seems well-positioned to keep leading the CRE pack for some time to come.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.