As 2019 draws to a close, it’s worth taking a look at where things stand with the industrial real estate market currently and where it is headed next. Unprecedented growth in U.S. distribution markets over the last decade have left many wondering when, not if, a downturn in markets is imminent. If uncertainty surrounding the timing of markets is not enough to cause a “decision-making” pause, add on an unpredictable political landscape that can quickly put a halt to a business’ growth plans. These macro-external factors are among the forces causing U.S. businesses to tread carefully as they develop and execute their go-to-market strategies. Specifically, ambiguity in global trade agreements and looming U.S. elections have caused several household names, and their upstream vendors, to triage or completely delay their decisions.
There are many trends that point to opportunities despite the economic uncertainties:
- E-commerce is driving industrial real estate demand, according to a NAIOP report;
- Returns are expected to remain high in the industrial sector, doubling office returns at around 11%, and it should stabilize as we enter 2020;
- Businesses are expanding to brand new locations, including smaller industrial buildings within densely packed cities and larger industrial buildings in the Midwest driving low vacancy rates in prime areas, according to CPExecutive;
- Specialty distribution facilities will put additional pressure on core distribution markets. By way of example, demand will continue to outweigh supply in the cold storage sector (to reach $19.69 billion in 2025 according to Research and Markets). Other innovative realms will lead to expansion across the cold chain industry, according to Materials Handling 247, as there are currently limited specialized warehouses fitted with the necessary technology and automated operations to properly control heating and cooling as needed by the businesses.
Companies do not have time to hesitate. When we emerge from 2019, we may find that the most intelligent companies were those that were focused on understanding the value (and cost) of building flexibility and optionality into their supply and distribution networks. It’s no small task as the service-level expectations of end customers is not showing signs of slowing driven by “established” disruptors like Amazon and the newer breed disruptors seemingly cropping up in every imaginable industry. Today’s business leaders are under constant bombardment to keep their companies both current and profitable. For many, this will result in diminished margin and market share. The intelligent ones, however, will take a deeper look at the intersection of supply, labor, utilities and real estate to identify ways to remain resilient. They will develop holistic and malleable plans to close the gap between supply and demand.
Where Is the Industrial Real Estate Market Headed?
Whenever possible, leveraging technology is the right approach to take. By combining the right people, resources and technology, businesses can make sense of their total cost of operations. Technology can help overlay intelligence over these data, and by working with the right subject matter experts, businesses can conduct the necessary due diligence to develop the right strategy and implement the right process that supports operational efficiencies.
The key to treading through this minefield of uncertainties for any business executive is to take mindful steps for mid- to long-term returns. An executive should look at all aspects of the business portfolio, gather requisite market data that acknowledges historical trends, and combine this data with the right expertise and technology to create an insightful analytics dashboard. This will help in identifying strategic next steps to make informed business decisions.
As we move into 2020, take time to review your real estate portfolio and initiate plans that will lay a strong foundation for what should be an eventful year with the election and foreign policy changes. There are more uncertainties on the horizon and every business should be prioritizing its real estate portfolio planning, strategizing against political impact on economic policies, and creating backup plans for revenue and market protection.
Adam Petrillo is head of the Industrial Services for Savills, spearheading its strategic direction, leading a dedicated in-house team for advisory and transactions providing integrated consulting and brokerage services to some of the largest industrial companies in the world impacting their supply chain operations, logistics, warehouse, distribution and manufacturing real estate in North America.