Robust 2-year forecast for US industrial real estate

Robust 2-year forecast for US industrial real estate

Demand for U.S. industrial property will remain strong for at least the next 24 months even though the market for manufacturing and distribution facilities has experienced four years of continuous growth, according to the U.S. Industrial Outlook published this week by CBRE Research.

“I can’t think of any client who’s not in a healthy growth mode,” Blaine Kelley, senior vice president in CBRE’s global supply chain practice, told JOC.com.

Although the demand will continue unabated for big-box structures of 500,000 to more than 1 million square feet, the next two years should also witness growth in development of light-industrial properties of less than 200,000 square feet.

“Light industrial facilities may be the best bet for growth in 2015,” CBRE stated. “With demand rising for facilities in smaller infill locations inland and in supply-constrained urban areas, light industrial fundamentals will see a boost in 2015,” the report stated.

A resurgence in U.S. manufacturing driven by investments in automation and technology will contribute to the buoyant industrial market. The U.S. remains the world’s second largest manufacturer after China. During and immediately after the 2008-09 recession, manufacturers invested in technology and automation to improve the efficiency of their production processes as well as to streamline their supply chains, Kelley said.

Now that the economy is growing and consumers are spending, manufacturers are expanding operations. This is promoting strong demand across various regions and product types, CBRE stated. More efficient manufacturing and supply chain processes will create a demand for additional industrial space in key industries such as automotive, energy, aerospace and consumer packaged goods, but also in small business sectors that are more regionally focused.

As a result, companies that are growing want to be close to their markets in urban areas. This is creating demand for properties of 200,000 square feet or less in cities. Much of the demand will be filled by repurposing existing properties at infill locations, either through tearing down existing structures and building new ones, or performing extensive refurbishing of the existing buildings, Kelley said.

These facilities of less than 200,000 square feet in urban locations will also fill a new role in the supply chain that calls for proximity to market. The modern supply chain has evolved to become a complex web of distribution facilities anchored by regional big-box hubs and supported by a network of light industrial properties that serve as a “crucial middle point in delivery of goods to the end user,” be it a retail location, manufacturing plant or the front door of the consumer,” CBRE stated.

Construction of new industrial properties, both large and small, is finally back on track after the lengthy recession and its aftermath. “I am struck by how much the supply spigot was turned off in 2007,” Kelley said. That is why it is taking longer today than it did after previous recessions in the early 1990s and 2000s for growth in construction of new properties to return to normal levels, he said.

CBRE projects that new deliveries of industrial property nationally will total 140 million square feet this year, making it the strongest year of development since the recession. New deliveries of industrial property in 2016 are projected to total 144 million square feet.

Construction could be constrained somewhat by higher costs, CBRE stated. Despite lower energy prices, construction costs are increasing due to a shortage of labor caused by the exit of many workers from the construction industry during the recession.

The largest hubs that are served by seaports or high quality inland infrastructure, such as Southern California’s Inland Empire, Chicago, Dallas, Houston and Atlanta will attract much of the investment capital in industrial properties, but secondary markets such as Phoenix, Kansas City, Indianapolis and Columbus will also do well in the coming 24 months, CBRE stated. Kelley said New Jersey would be poised for growth if it were not for impediments to new construction.

Even though West Coast ports have struggled with severe congestion since last fall, due in part to work slowdowns by the International Longshore and Warehouse Union during its lengthy contract negotiations with waterfront employers, new development will continue to surge in the Inland Empire 50 miles east of Los Angeles.

“The Inland Empire is an empire on to itself,” Kelley said. The Southern California market and the Los Angeles-Long Beach port complex are too large for developers, investors and users to ignore, he said.

With supply and demand projected to grow strongly, but in sync with each other, CBRE is projecting modest growth of 4-5 percent in rental and lease rates. The really good news, Kelley said, is that there is plenty of money available to fund the projects that are needed. Investors went into hibernation during the recession, but all investor types including private equity, hedge funds and foreign investors are anxious to deploy capital in industrial real estate. “The capital is definitely there,” he said.

Contact Bill Mongelluzzo at bmongelluzzo@joc.com and follow him on Twitter: @billmongelluzzo