Consumption and efficient delivery are driving ongoing growth in demand for industrial warehouse property.
The Logistics Industry: A Growing Force in the U.S. Economy
FIGURE 1: Industrial Sector Outperformed This Cycle
National Demand Drivers: All at Record Highs
FIGURE 2: Select U.S. Supply Chain Indicators (2000-2018)
U.S. Trade. U.S. trade is very healthy, with both imports and exports, leading demand drivers of U.S. warehouse space, at a new peak. Research shows that a dollar increase in imports consumes three times as much warehouse space as a dollar increase in exports, due to the multi-point repackaging and storage of inbound goods.3 At the same time, local production of goods, or the ‘regionalization’ in manufacturing, is on the rise given the recent increase in transit and labor costs globally. More companies are reportedly seeking new plant facilities closer to customers to offset high trucking costs and leverage pockets of available labor.4
Business Inventories. Corporate spending has been greatly buoyed by recent tax reforms and higher overall demand. Inventory restocking, tracked by manufacturers, retailers, and merchant wholesalers, has picked up and been integral to the recent upturn in gross domestic product (GDP) growth. New orders and stock of durable goods, autos, planes, machinery, and energy products have been strong. Domestic manufacturing still accounts for about 12% of U.S. economic output.5 Industrial production also rose to an historical high in 2018, boosted by gains in factory and energy output.
All these factors have driven logistics employment to levels not seen since the 1990s. Hiring in the sector is now contributing more to U.S. job growth and is a rising share of the total labor force. One in five job openings is now within the trade, transportation, and utilities industry.6
Industrial Real Estate Fundamentals
FIGURE 3: Total Stock by Size (SF)
FIGURE 4: Total Stock by Vintage
FIGURE 5: Vacancy & Effective Rent (2014-2018)
Source: CBRE-EA, Clarion Partners Investment Research, Q3 2018. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
FIGURE 6: E-Commerce as a % of Total Retail Sales
- Labor Impact. Currently, access to labor is a key factor in site selection. Going forward, robots and artificial intelligence will be incorporated more frequently into operations, which should optimize speed and reduce costs. More warehouses will likely feature automated picking, real-time tracking, sophisticated bar coding, and hyper-connectivity infrastructure throughout.17 In the future, proximity to large labor pools may be less critical with the rising use of robotics.
- Transit Impact. Many companies are also strengthening supply chain connections to existing plant operations through investments in various new logistics carrier services, such as driverless cars and drones. Fast turnaround times tend to spur increased orders.18 The major 3PLs and carriers (UPS and FedEx) all face serious supply constraints in space, fleet, and labor, which modern innovation should improve.
Volume & Passage of Goods. Most logistics hubs have reported higher overall volume of goods, which usually translates into more demand for physical space. More tepid growth in global trade may be an outcome of more localized production worldwide, which could potentially accelerate with emerging 3D printing technologies. Furthermore, greater use of drones and driverless cars is likely to accelerate speedy delivery in the future. Specialized products and expedited personal delivery will likely boost demand for air cargo carriers and airport distribution hubs as well.
Trade Policy. The recent import tariffs are ultimately designed to boost domestic production; however, these reforms could increase the cost of some goods, raise consumer prices, and slow economic growth. An ongoing tax on trade, in the long run, could lead to increased nearshoring and onshoring depending on input costs, productivity, and transportation efficiency. U.S. warehouses ultimately serve domestic consumption. The preference of warehouse locations may change, but overall demand for distribution space should continue to grow along with retail spending.
Investment Opportunities: Underway & Emerging
The sector offers many compelling opportunities that are both well underway and just emerging:
- U.S. Metropolitan Statistical Areas (MSAs) with Largest Populations and Fastest Growth. In the coming years, more traditional warehouses in the surrounding exurbs of the largest U.S. cities will continue to be in high demand, as should the regions with the fastest population growth, now largely in the South/Southeast/Southwest. Over the past five years, rent growth has surged in Oakland, Riverside, New York, San Francisco, Fort Worth, Orange County, Atlanta, Seattle, Las Vegas, Allentown, and West Palm Beach.21
- Low-Cost Inland with Good Coastal Access. Even as the local delivery model accelerates, the soaring cost and scarcity of coastal land should drive steady demand in the largest inland hubs, especially for big-box warehouses. These hubs include South-Central Pennsylvania, Las Vegas, the Central Valley (CA), Atlanta, Dallas-Fort Worth, Indianapolis, and Chicago.
- The ‘Last Mile.’ Online retail sales have transformed consumer expectations and revolutionized how companies transport inventory from business to consumer. Optimizing speed and minimizing cost are more essential than ever. Locally-sourced logistics, referred to as the ‘last mile,’ have driven much of the recent warehouse redevelopment and leasing activity in and around the largest metropolitan statistical areas (MSAs).22 Local and regional warehouses and distribution centers are now more prevalent, with the same-day and two-day delivery model as the new norm.23 Amazon Prime is the dominant player in this service.
- Inner Cities. To keep pace, many major retailers are implementing advanced last-mile distribution strategies designed to streamline logistics. Vertical warehouses in urban infill locations within the heart of the most densely populated areas – even in the most expensive real estate markets in the country – are now on the rise. Multi-story warehouses may make sense because of scarce land availability, justifiable rents, and accessibility to dense population. One of the largest is now in Brooklyn, New York.24 Local zoning in cities will certainly impact the growth of these smaller-sized urban properties.
- Functionally Obsolete Inventory. Over 75% of stock was built before 2000 prior to the e-commerce boom, which has transformed the structural demands of many fulfillment centers. Clear heights, for example, are increasing. Today new building clear heights typically range from 36 to 40 feet, up from 24 to 26 feet in the 1990s.25 In the years ahead, the rate of functional obsolescence is expected to rise. Based on the average warehouse lifespan of 50 years, almost 10% (approximately 470 million sf) of the existing stock will surpass the average useful life threshold over the next five years. Currently, Northern NJ, Pittsburgh, Boston, and Philadelphia, all near large population clusters, report a weighted average age of 45 to 60 years.26
- Shift from West to East Coast Ports. Until recently, the West Coast captured a larger share of loaded TEU container volume than the East Coast; however, recently, the market share between the coasts has evened at 46%, with most of the U.S. population residing on the East Coast and more frequent ship traffic from both the Panama and Suez Canals.27 Most East Coast ports are now post-Panamax ready − able to accommodate larger ships. TEU volume has grown most quickly at the NY/NJ, Norfolk, Savannah, and Charleston ports, though cost-effective inland ports may have benefited more based on overall warehouse storage volumes.
- Specialty Warehouses (e.g. E-Grocery & E-Pharmacy). A big growth area that is just beginning to take shape is in e-grocery and e-pharmaceuticals. A rising share of grocery and pharmacy sales are occurring online. Online grocery sales, now less than 5% of total grocery sales, are predicted to capture 20% of total grocery sales by 2025.28
In the years ahead, there is still sizeable opportunity in warehouse facilities amid a shrinking availability of prime land and the anticipated high-tech productivity gains. Most buyers are bullish and are willing to buy at record-high prices and low cap rates. We recommend building up positions in strategic, supply-constrained markets for long-term above-average rent growth and appreciation potential. Our outlook for industrial remains bright, and we expect the sector’s outperformance to continue.
Investment in real estate entails significant risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
1 Moody’s Analytics. Q4 2018. Note: Based on data through October.
2 U.S. Census, Clarion Partners Investment Research. Q3 2018. Note: E-commerce growth rate range based on the past 5-10 years.
3 CBRE. What Trade Barriers Might Mean for U.S. Warehouse Demand. January 2017.
4 WSJ. More Factories Crop Up Closer to Customers. November 2018.
5 U.S. Bureau of Economic Analysis. Q3 2018.
6 WSJ. Logistics Hiring Contributes 10% of October U.S. Job Growth November 2018.
7 CBRE-EA. Q3 2018. Note: Data excludes Allentown, Honolulu, Memphis, Pittsburgh, Raleigh, Toledo, and Vallejo.
8 Ibid. Note: Average warehouse size weighted by total number of buildings and square footage for each building size range.
9 CBRE. 2018.
10 e-Marketer Retail. 2018.
12 U.S. Census, A.T. Kearney. The Future of Shopping Centers. 2018.
13 CBRE. 2018.
14 U.S. Census, A.T. Kearney. The Future of Shopping Centers. 2018. Note: E-commerce is forecast to grow at a CAGR of 10.5% (2015-2030) vs. a CAGR of 15% (2005-2010) and 12% (2005-2020F). Retail sales are forecast to grow at a CAGR of 3% (2016-2030) vs. 3.3% growth (2015-2016) and 4.6% growth from (2014-2015).
15 CBRE. 2018.
17 Jones Lang LaSalle. 2018.
18 WSJ. More Factories Crop Up Closer to Customers. November 2018.
19 Based on the recent leasing activity from Clarion Partners’ industrial investments.
20 CBRE-EA. Q3 2018.
22 ULI, IMS Worldwide, Inc., NAIOP, CBRE-EA, MPVWL, Clarion Partners Investment Research, Q3 2018.
24 https://www.bisnow.com/seattle/news/industrial/instant gratification-millennials-expectations-drive-demand-for-industrialwarehouse-real-estate-91951.
26 CBRE-EA. Q3 2018.
27 Pacific Merchant Shipping Association, Clarion Partners Investment Research. Q3 2018.
28 Coresight. Q2 2018. Forbes. Online Grocery Sales to Reach $100 Billion In 2025; Amazon Is Current and Future Leader. January 2018.
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