The available capacity within the industrial real estate market is dependent on many factors. Undeterred by political elections and an uncertain economy, the real estate market continued to show strong growth in 2016. Given the tightened capacity, occupiers found it challenging to source for their warehouse and distribution needs.
In fact, the fourth quarter of 2016 contributed to a 26th consecutive quarter of positive net absorption, which is the longest streak CBRE has had to date1 and 2017 is expected to continue this trend. This year, JLL anticipates low-interest rates, healthy consumer spending, and strong e-commerce growth will contribute to the continued growth within the industrial real estate market2.
One of the primary sectors to impact the real estate market has been e-commerce. Forrester, a market research firm, estimates that e-commerce sales will increase by 9.3 percent annually in the U.S. over the next five years3. The rapid growth of e-commerce, with its high intensity of industrial real estate use and the increasing need to locate closer to consumers, is causing a shift in how goods are distributed.
The evolution of e-commerce has also affected the size of distribution centers. Companies are looking to lease or develop larger spaces to incorporate additional automation and labor to keep up with inventory and shipping speed demands. In response to the continued growth of e-commerce, CBRE expects that e-commerce will generate roughly 40 million square feet of new demand each year through 20204.
Demand for warehouses and distribution centers continues to increase, as there is a possibility of infrastructure improvements throughout North America and ongoing company expansions. Demand will continue to grow and outpace the slow but steady development occurring across North America. Although there are various location preferences for companies to establish a DC, there is a still a strong push for locations near ports and close to major metropolitan areas such as Southern California, Chicago, Boston, Eastern Pennsylvania, Dallas Fort-Worth, Atlanta, and New Jersey5.
Due to this demand and supply, the national industrial real estate rental rates also reached an all-time high by the end of 2016. CBRE expects rental rates to continue to increase by roughly five percent in 20176. With the tightened capacity, need for larger spaces, and high rental rates, businesses may find it difficult to find space to meet their needs and be turning to develop built-to-suit facilities to construct a custom space.
Michael Landsburg, VP of Real Estate at NFI, noted, “Industrial real estate continues to move to the forefront for both companies looking to solve their supply chain challenges and investors/owners looking to deploy capital. 2017 should be another dynamic year.” Companies can prepare for the future by continuing to strategize for possibilities of future growth and expansion.