As a tech company and a marketplace that has seen thousands of deals conducted since our 2015 inception, we are data-driven and pattern focused. However, for our 2017 market predictions, we chose to walk away from our computers and drive into our neighborhoods, speak with our clients, visit stores, and approach our forward-looking projections instinctively to avoid analytical-paralysis and failure to read between the lines.
Commercial real estate data and surveys can often organize the “what” but sometimes fail to explain the “why” (or input). We wanted to focus on the “why” with the expectation that we (or anyone else) will not get the predictions perfect but that the value sometimes resides in the thought-journey and not solely the destination.
During the last three or four years, land values have increased significantly in most major port and shipping markets. Often, the highest-and-best-use (or only use that will “pencil-out”) has been residential even in once-industrial submarkets (Doral, FL, for instance).
Housing brings new residents and demographics. As such, it creates the need for warehousing, particularly in an economy where Amazon and FedEx have prioritized speed and logistics and require distribution proximity to population clusters. Rising land costs have triggered two reactions: 1) because land doesn’t pencil-out well for industrial development, there has been little new supply, and 2) increased residential demographics have increased demand for industrial space.
Industrial real estate serves as a safe investment because it remains semi-immune to technological advances, which may threaten other asset types. Modern technology advances and trends like automation, e-commerce, and telecommuting do not generally hurt industrial occupancy or demand; instead, it could fuel it.
Whereas telecommuting trends can contribute to office space demands, and e-commerce has contributed to the decrease of brick-and-mortar retail demand, manufacturing and distribution continue to drive the production of distribution hubs across the country. And while automation lessened the need for skilled workers, the need to be near population clusters for quick distribution will limit significant sprawl from cities.
Future segment potential impactors and risks include:
- oil prices – which are currently low and affect manufacturing and transportation costs,
- the political landscape and its resulting impact on trade,
- new manufacturing technology, and
- the housing market.
Politically, the administration’s oft-discussed views on trade could result in decreased imports, which could slow activity at port markets. However, penalties for companies moving overseas to exploit cheaper labor (known as “offshoring”) could keep companies and occupiers in the US and potentially increase domestic manufacturing and exporting.
Additionally, a professed government plan for mass infrastructure investment will certainly require industrial storage and manufacturing to support those construction efforts. Next level technology like 3-D printers could eventually change how products are manufactured and delivered but its impact will likely be minimal at first.
Last, keep an eye on the housing market. A cooling in the residential market will likely decrease land and construction costs and open the door for industrial developers to deliver more supply. Too, occupiers tied to the housing industry (like tile and furniture producers) will suffer if the housing market cools. In 2007, we saw occupiers struggle, vacancies increase, and rents soften.
While pricing has risen and yields have dropped as low as 4% for core products in top markets, we predict industrial real estate to be a very safe asset type with great fundamentals and macro-trends favoring its long-term health. Deal velocity or transaction volume, which is currently down about 25% from 2015, will remain below historical norms as some investors can’t stomach the compressed yields resulting from competition and strong growth assumptions. However, patient capital will continue to acquire assets and will benefit in the long-term when they do.
While rents in some markets have reached once unimaginable highs and will someday soon flirt with $20/SF levels, lower transportation and labor costs resulting from cheap oil and automation have helped manufacturers offset increased occupancy costs. As land becomes scarcer and the development of industrial space less practical, we think occupancies will stay high, and rent growth will fuel long-term IRRs despite currently high asset values.