Rich Thompson, International Director and Leader, Supply Chain & Logistics Solutions, JLL (August 2012)
Recent entry to the North American logistics and industrial property market by Australian commercial real estate investor and developer the Goodman Group is the latest news to underscore the resiliency and opportunities in the U.S. industrial property market. Goodman Group expects to invest $1.5 billion in the sector across North America, mainly in new developments, through an agreement with Los Angeles-based Birtcher Development. We view this influx of foreign capital to the U.S. industrial market as one of the key trends driving the resurgence of the sector.
Low U.S. interest rates, positive macroeconomic indicators, and an increasing demand for prime, well-located logistics property are some of the other elements shining a spotlight on industrial assets such as warehouses and distribution centers. Other factors like the revival of the U.S. manufacturing sector, the trend toward moving manufacturing back to the United States, and the demand for "big-box" distribution space by the thriving e-commerce sector are also driving developers and investors toward the sector.
Compared with other product types, industrial properties are less capital-intensive, have not historically experienced the highs and lows in rental rates and values, and remain a relatively stable and predictable asset class. There are six key themes driving this resurgence:
- 1. Strong supply and demand characteristics - The industrial real estate sector currently benefits from stable, healthy demand and an increasingly constrained supply of high quality space. The national vacancy rate has slowly declined from its 2010 peak to reach 9.1 percent, a level last seen in 2009. Given a rather nominal, but still steady, amount of positive net occupancy, it has fallen by 90 basis points from the first quarter of 2011, when the figure was at 10 percent. Now it is moving toward pre-recession levels of 7.5 percent. Demand has maintained a stable trajectory, marked by eight consecutive quarters of positive net absorption, but at 25.3 million square feet in the first quarter, it remains well below pre-recession levels. However, a spike in demand for "big-box" distribution and logistics space (>400,000 square feet) has re-introduced speculative development in key hub markets where vacancy has decreased significantly. In the meantime, a renewed confidence from corporations has triggered a meaningful flow of build-to-suit activity.
- 2. Foreign capital seizing the moment - The U.S. industrial investment market is ripe for growth. Since the recession in 2009 - when the annual industrial sales volume plummeted to just $10.9 billion - the pace of industrial investment sales has increased to $35.1 billion in 2011. The overall sales volume for 2012 will likely be in the $40 billion to $45 billion range. Market activity is expected to be extremely strong in the second and third quarters, with limited new product coming to market in the fourth quarter as the election approaches. Investors and developers are scouring the country's prominent industrial and logistics hubs including California's Inland Empire, Dallas, and Chicago.
- 3. Global supply chain trends - Growing labor costs in Asia, particularly China, coupled with volatile fuel costs and exchange rates, have forced companies to re-evaluate their supply chain networks. The United States is a huge consumer market and companies want to be in close proximity to their customers to improve speed-to-market, reduce inventory carrying and freight costs, as well as reduce risk and improve customer service. These critical supply-chain considerations make the United States more attractive from a manufacturing or sourcing perspective. Companies are diversifying their manufacturing and sourcing decisions just as an investor would their personal investment portfolio. Having a physical presence in the United States is becoming increasingly important and will therefore translate into more demand for warehouse, distribution, and manufacturing space.
- 4. The explosion of e-commerce in the U.S. and globally - The primary industries leading the demand for warehouse and distribution space are food-and-beverage, e-commerce, and traditional retail. In fact, one third of all demand for "big-box" space is tied to multi-channel retailers or "e-tailers." The influx of e-commerce and m-commerce (mobile) has revolutionized the retail sector. Retailers tapping multiple channels to sell their merchandise are finding it more cost-effective to increase online logistics operations rather than open more traditional stores, necessitating an entirely different distribution model. Therefore, retailers are evolving their regional distribution networks to include e-commerce distribution centers. Demand from these companies has been growing since 2009 and will continue to do so. They will focus on hubs in southern California, the Midwest (the Chicago-Indiana corridor), northern New Jersey, and central Pennsylvania.
- 5. Solid U.S. connectivity and infrastructure -The United States has a world-class supply chain infrastructure (i.e., ports, highways, airports, rail), which is another important factor in attracting and retaining manufacturers. We are seeing increased interest in inland ports (i.e., intermodal distribution centers located inland) that are connected directly to major seaports. With pressure mounting on our nation's seaports and high demand for port warehouse space, moving goods directly by rail to inland ports becomes increasingly attractive. The growing use of intermodal transportation will help companies reduce costs and create new opportunities for developers and investors in the industrial sector.
- 6.The Panama Canal expansion project - This project has not only been hailed as a game-changer for shippers, but also as an opportunity for developers and investors here in the United States. The canal is undergoing a $5.2 billion expansion to allow greater traffic flow and to accommodate the next generation of "Super Post-Panamax" vessels, named because they exceed the size limitations of the existing canal system. However, numerous ports along the U.S. Eastern and Gulf coasts do not have the capacity to receive the larger ships.
One solution has been to create new terminals next to the canal itself. This will enable the Super Post-Panamax and other vessels to transit via the new locks, and transfer their cargo at the new terminals, such as the new Panama Colon Container Port (PCCP) being developed on the Atlantic side of the canal. This is where the large ships will transfer their cargo to smaller container ships capable of serving ports on the U.S. East Coast.
But in the United States, the expansion has encouraged growth and investment within the broader logistics universe, impacting everything from shipping and rail-line construction to warehousing and terminal development. This has also prompted companies in both seaport and inland markets to re-examine their logistics processes and facility positioning. And the ports that stand to win the vigorous market share battle will be those that take the most holistic approach to moving goods in and out as quickly and efficiently as possible.
The Port of Virginia, for example, is undergoing a $2.2 billion multi-phase project to create the most modern terminal able to cater to the larger ships. Its private/public partnership with APM Terminal in Portsmouth will also increase its capacity and form a blueprint for other ports to follow. The Port of Newark also has funding in place for a harbor-deepening project, but in another $1 billion project, it must raise the Bayonne Bridge to receive the larger vessels. Additionally, in another improvement anticipated to double cargo traffic over the next decade, the port has started work on a $600 million ship-to-rail container facility in Jersey City. While numerous seaports are gearing up with development or logistics improvements, the West Coast ports are working on automation and efficiency.
The demand for industrial property around these U.S. receiving ports - both inland and coastal - is set to rise as U.S. ports prepare to cater to the next generation of large shipping vessels. This offers further options for serious players considering the U.S. industrial real estate market.