The industrial landscape is shifting. In recent years, industrial real estate has become a premium asset class, and as we look to 2020 and beyond, the big question is, will the industrial boom continue?
Developers, corporations, and retailers want to know if rents will continue to rise and if vacancies will remain at historic lows. They want to pursue infrastructure in markets that guarantee returns, and ultimately, they want to plan for success. In reality, the only way to plan for success is to assess each element of your business approach holistically.
Key Indicators: Supply, Rents…and Supply
In 2019, the new supply of industrial real estate space in North America finally outpaced demand registering 336.3 million square feet (msf). Looking ahead, supply will remain on track to continue on this course over the next two years, outpacing demand and rising to 573.4 msf from 2020–2021.
This projection matters because new supply is alleviating some pressure and constraints that occupiers have felt when planning expansion, site selection, and supply chain optimizations in recent years. But while supply outstripping demand sounds like a boon to some, it’s just part of the entire picture. While more choices for tenants allows some selectivity, it won’t necessarily mean a decrease in rental rates. In fact, in the coming two years, the average net asking rents in North America are expected to rise to $6.95 per square foot (psf) by year-end 2021 — an increase of 6.8 percent over year-end 2019.
Businesses should keep an eye on cities that boast either high demand or supply-constrained markets, especially those near ports. At the extreme, there are seven markets forecasted to register more than 10 percent rent growth from 2020 to 2021.
But why is this? Why exactly won’t rents decrease as supply increases? This dual growth is driven by constant competition for new and modernized warehouse and distribution space that exists even for cities that aren’t port-proximate or near capacity for new industrial real estate.
Roughly 60 percent of existing industrial supply is approximately 20 years old, and businesses that are looking to compete are more frequently contending for space that will give them an edge on their opponents. Increasingly, it is specialty buildings — ranging from multistory warehouses or temperature-controlled facilities, to in-fill and last-mile facilities — that a modern business relies on. With a comprehensive approach to real estate and the supply chain, buyers can better evaluate which markets offer a competitive edge for needed facilities.
Strategic businesses will choose sites with sufficient labor supply over other criteria on their balance sheets.
The Biggest Priority for Holistic Balance Sheets
This demand for modern infrastructure, means a demand for a modern workforce. Simply put, labor is expensive, accounting for nearly 50 percent of traditional warehouse operating costs. In North America, labor markets have been historically tight and are expected to become tighter in the coming two years.
As headcounts in modern fulfillment centers rise, local labor market conditions should be an increasing priority for occupiers. Strategic businesses will choose sites with sufficient labor supply over other criteria on their balance sheets. Cities to watch are the well positioned secondary markets, like Orlando, Raleigh, Austin, and Las Vegas, that are set to experience population growth at nearly three times the average North American city.
Finding available, affordable, and appropriately skilled warehouse labor will remain a challenge over the next two years, with occupiers increasingly embracing access to labor as a key to a holistic balance sheet.
As the industrial landscape shifts and expands, it is crucial for developers, corporations, and retailers to evaluate all of the factors at play. From monitoring opportune markets and their growth potential to assessing the impact of labor costs, a holistic approach to real estate will be the key to success in the industrial market both now and ahead.