The industrial real estate sector is thriving as demand for warehouses to store products and complete online retail orders continues to rise.
The light industrial subsector specifically, which the real estate brokerage company CBRE defines as smaller footprint properties with less than 120,000 square feet for warehousing or light manufacturing, has experienced noticeable growth driven by the need for “last-mile” distribution centers. By using these smaller industrial properties as warehouses, it allows e-commerce retailers to make quick — and even same-day — deliveries to consumers.
Historically speaking, the industrial property sector had been in a state of decline prior to the rise of e-commerce. The United States peaked as an industrial powerhouse in the 1950s, when the country manufactured an array of goods. However, since then, the industrial sector has steadily declined as those jobs were outsourced to other regions, especially to Asia. As industrial properties languished, the sector was long considered unattractive compared to other asset classes, according to a report by JLL.
However, thanks in large part to the rise of e-commerce over the past decade, the industrial sector has been rejuvenated – and light industrial has been leading the way. As an indication of heightened demand, from the second quarter of 2014 to the second quarter of 2019, the rate of the inventory of available space for light industrial properties in the country dropped nearly 4 percentage points from 11.3% to 7.4%, according to a 2019 CBRE report on the subsector. This surge in demand surpassed the rate for the total industrial real estate sector, which fell 3.2 percentage points over the same period.
Additionally, rents for light industrial properties grew 33% to an average of $6.67 per square foot from $4.99 per square foot during those five years, more than doubling the pace of rent growth in industrial properties with more than 250,000 square feet, which rose 16%, according to the CBRE report.
Demand for the subsector has been assisted by the fact that land in urban areas is very scarce while demand for faster same-day delivery has been accelerating amid heavy competition between e-commerce companies, such as Amazon, eBay, Wayfair and numerous others. According to CBRE’s 2020 industrial and logistics outlook report, it is expected that demand for light industrial properties will continue to be strong “as e-commerce companies race to offer same-day delivery to customers.”
That outlook was published before the COVID-19 pandemic disrupted financial markets earlier this year. However, so far, industrial properties appear to have been less impacted by the effects the virus has had on the economy, along with the multifamily sector.
For example, industrial rent collections have led other real estate sectors (such as office, apartments, health care, and retail) during the months of the pandemic from April to July, according to the National Association of Real Estate Investment Trust’s monthly rent collections report. The sector has yet to report less than 95.7% in rent collections for any recent month, and in July — the latest month of available data — it reported 99.4% of rents collected.
Due to the societal changes stemming from the pandemic, such as the need to socially distance, business closures and “stay-at-home” policies, the industrial real estate sector was critically important. During the height of the COVID-19 pandemic in the United States, consumers shifted from making purchases at brick-and-mortar retailers to online retailers, which further increased the need for warehouses and logistical centers.
Although it’s too early to know exactly what the long-term effects of COVID-19 will be on the industrial real estate sector, real estate operators in the space expect that the disruption of supply chains will continue to drive demand for warehouses, according to a recent article by The Wall Street Journal.
The rise of e-commerce prior to the pandemic had already started a new wave of growth for the industrial sector, but if changes in consumers habits to buy more products online persists past the pandemic, industrial real estate – and the light industrial subsector in particular – may continue to experience tremendous growth.
This article is part of a series exploring different asset classes. Read our article about single-family rentals.