It’s been a record-breaking year for the industrial real estate sector. Demand has continued to outpace supply, driving the sector’s vacancy rate down to 5.8 percent as of the end of the third quarter, according to the JLL Industrial Investment Outlook – Q3 2016.
Landlords have achieved the upper hand, with rents rising 8.2 percent over the previous year, and investors are seizing the opportunity to buy into the expanding market. While year-over-year investment in industrial real estate is down 28.9 percent from Q3 2015, total investment volumes are on track to set the second-largest tally since 2008.
Many uncertainties will accompany the industrial property sector in 2017, but the overall outlook continues to look positive. Here are five factors that will drive demand in the new year:
- The infrastructure revival. There’s a lot of buzz about the potential for increased infrastructure spending in the United States, following the president-elect’s expressed interest in strengthening functionally obsolete roads, bridges and other infrastructure. Increased infrastructure spending will have a ripple effect for industrial real estate; as upgrades are planned, raw materials will be needed, along with warehouses to store them.
- E-commerce and urban logistics continue rapid evolution. Online retailers are working hard to perfect their supply chains in an effort to deliver goods to consumers more rapidly and cost-effectively than ever before. They’re asking what, where and how many distribution centers are needed to feed the consumer e-commerce appetite. In the second half of 2016, e-commerce growth was a key factor pushing down the national industrial market’s vacancy to its 16-year low of less than 6 percent, with continued declining vacancy expected in 2017. For example, when Distribution and Marking Services Inc. leased 350,000 square feet of space at Wonderland Industrial Park in Shafter, California, the site’s central location and availability for fast move-in were critical — but so was the longstanding retail client housed nearby.
- Ports benefit from both infrastructure updates and e-commerce. Growth in e-commerce is also expected to contribute to the revival of America’s ports system, with high demand for surrounding warehouse and mixed-use infrastructure. The coastal ports of Los Angeles and of New York and New Jersey have been the darlings of the industrial sector. However, with increased infrastructure spending and the repurposing of obsolete terminals, 2017 could be the year the Mississippi waterway reclaims its former glory in the global supply chain. Demand for industrial real estate in the region is expected to follow.
- Institutional investor interest is higher than ever. Industrial real estate remains a lucrative investment opportunity in the eyes of institutional investors. In fact, year-end industrial investment sale volumes could reach above $45 billion, the second-largest annual tally since 2008. High-volume investment activity is indicative of the asset class’s ability to weather global economic, political and financial uncertainty.
- The rise of creative industrial real estate development. Unprecedented industrial real estate demand and the push to improve last-mile delivery services may influence development throughout the country, persuading some companies to seek space in secondary or tertiary markets. Smaller urban core warehouses and fulfillment centers, reconverted assets and multistory warehouses could become last-mile solutions for many companies in 2017.
From changes in trade policies and regulations to specific issues that affect how goods are transported, numerous unknowns are weighing on executives’ minds as we kick off 2017. Fundamentals, however, remain strong: construction still trails demand, infrastructure investment looks promising and the proliferation of e-commerce will undoubtedly continue. We’re optimistic for a booming industrial real estate market in the year ahead.
Craig S. Meyer, SIOR, FRICS, is the president of JLL’s Industrial group.