The start of 2017 was characterized by uncertainty about the economic and political outlook, which never seemed to abate as the year went on. After an eventful year, which included a series of frequent and intense natural disasters, the U.S. economy came out on top. In this environment of broader economic growth, one real estate sector has emerged as a clear winner: industrial.
Once the ugly duckling of commercial real estate, industrial warehouses and distribution centers are emerging as desirable swans for both real estate investors and corporate occupiers. Vacancy rates remain steadily low, hovering at 5.0 percent at the end of 2017. Meanwhile, rents in the same period reached $5.49 per square foot, another all-time high.
What’s behind the sector’s success? The growing e-commerce market takes credit for a great deal of the market’s growth. Online transactions now represent around 9 percent of total U.S. sales, and experts predict this could reach nearly 14 percent in the coming years. But consumers’ changing shopping habits aren’t the only factor influencing industrial real estate.
The industrial real estate market is set to soar in 2018, thanks to these five reasons:
- The three Ts of Trump – Trade, Tax and Transportation infrastructure. With the tax bill signed and trade agreement renegotiations in progress, doors could open for progress on transportation infrastructure. Signs are that 2018 could be the year for major infrastructure legislation, which could have significant implications for industrial real estate markets. After all, improvements to roads, bridges and other infrastructure will require raw materials — and warehouses to store them.
- E-commerce continues to set records. The e-commerce “beast” is propelling the U.S. industrial market to new highs as online retailers seek new distribution centers to feed consumer demand. Nearly a quarter of total U.S. leasing demand in Q3 2017 came from e-commerce companies expanding their footprints, making e-commerce the fastest growing sector.
- Urban logistics move closer to the customer. The ideal location for a warehouse today runs counter to everything we knew about industrial site selection of yesteryear. E-commerce and related logistics companies are snapping up “last-mile” warehouse spaces and expanding their presence beyond a single mega-warehouse facility to multiple U.S. nodes. As distribution networks become increasingly critical to e-commerce success, expect tenants to continue seeking smaller distribution centers closer to urban cores to focus on proximity to labor and customers.
- Continued investment in the darling of U.S. real estate. Institutional investors understand the lucrative potential of industrial real estate today. Amid surging demand for industrial space, investment sales were up 34.7 percent in 2017 and we see a resurgence in potential industrial real estate portfolio trades, according to JLL’s Q3 2017 Investment Quick Look.
- The Fourth Industrial Revolution is well underway. The robot revolution is changing the way industrial buildings are designed and utilized. Robots won’t completely replace human labor in the foreseeable future, but new technologies are already reshaping warehouses. Automation and drones are taking on more tasks, from transferring goods between trucks to managing inventory and picking merchandise off shelves. In turn, tenants are looking for properties designed to support advanced technology.
The industrial market closed out 2017 with all-time high rents, low vacancy and an active development pipeline. If the five trends outlined above continue to play out in the new year, we can expect to see this momentum continue. A thriving industrial real estate market, combined with investments in infrastructure, could likewise provide a positive boost to the U.S. economy.
Craig S. Meyer, SIOR, FRICS, is the president of JLL’s Industrial group.