ATLANTA — The bull market that e-commerce is supporting for warehouses and distribution centers appears to be “structural” and not just part of an economic cycle, allowing it to fuel expansion even during the next recession, an industrial real estate executive said.
“We’re seeing that e-commerce demand and the way e-commerce users are using industrial space is fundamentally changed,” David Egan, head of industrial research, Americas, at CBRE, said at JOC’s Inland Distribution Conference. “And we think it does allow us to say that there actually is something different this time.”
Soaring demand for US warehouses and distribution centers is outstripping supply and pushing rental rates higher. Egan said this is partly due to a strengthening economy, but that as much as 40 percent of increased demand appears to be attributable to e-commerce.
Consumers’ shift to e-commerce is fueling demand for distribution centers that are close to end users. CBRE estimates that each $1 billion in additional e-commerce sales equates to at least 1.25 million square feet of distribution space, “and we think that’s a conservative number,” Egan said.
Vacancy rates for US warehouse and distribution centers averaged 4.6 percent in the third quarter of this year, the lowest CBRE has seen in the decades it has tracked these rates, Egan said. Average rents, meanwhile, have hit a record $6.88, a 6.3 percent increase from 2016, he said.
Historically, demand for industrial real estate has been easy to forecast, Egan said. “If GDP expands, demand will expand. If GDP contracts, demand will contract.” However, he said demand growth has exceeded GDP growth during the last few years.
A key reason, Egan said, is the rise of e-commerce which has given an extra boost to demand for industrial real estate during the economy’s extended cyclical upturn since the end of the Great Recession.
Retailers are building distribution centers near major hubs, such as Atlanta, Chicago, and Dallas, but they also are seeking locations in smaller markets in order to be close to consumers demanding quick delivery for online orders.
Consumers’ embrace of e-commerce appears to be permanent and will support industrial real estate demand when the next recession inevitably comes, Egan said.
While industrial real estate is not immune to cycles, “we’re much more resistant to cycles than we ever have been before.” E-commerce demand “is going to persist, and it’s going to provide a pushback against whatever happens in the economy.”
Egan acknowledged that it is dangerous to say that markets have fundamentally changed, “but the industrial real estate market is behaving in a way that is unexpected, given the way we know markets have behaved in the past.”