E-commerce boom drives industrial real estate trends

As e-commerce goes, so goes the industrial real estate market. That could very well serve as a working thesis based on data recently issued by industrial real estate firm JLL.

The Chicago-based realtor made that clear in recent data highlighting market conditions for the first quarter of this year. Perhaps the most telling statistic was that the first quarter vacancy rate checked in a 6.2 percent, which stands as a 16-year low and below the previous cycle’s low point of 7.4 percent in early 2008. And even with 131 million square-feet of new spec construction coming online in 2016, JLL said that vacancy rates could remain in the low 6 percent range through the end of the year.

Other notable data points issued by JLL included:
-net absorption averaged 56.1 million square feet per quarter from 2014 through the first quarter of 2016 and it has been positive for 24 straight quarters, with the first quarter rate up 6.6 percent annually;
-warehouse asking rents are expected to rise 4.5 percent and head up for the sixth straight year, with the current asking rate at $4.90 per square-foot in a NNN-basis; and
-JLL also pointed to National Retail Federation data showing that 2016 retail sales are expected to grow 3.6 percent in 2016

To a large degree, these rent and vacancy numbers are being driven by e-commerce gains in tandem with “last mile” delivery supply chain-related changes and improvements and changes in warehousing and distribution as they relate to e-commerce, too.

“E-commerce across all regions of the world is still a double-digit digit growth business, and we have seen the thin line from us as consumers, as well as retailers aligning supply chain and industrial real estate to support the e-commerce platform and that has not changed at all,” said Kris Bjorson, International Director and leader of JLL’s Retail Distribution Service business. “The same type of pent up demand is out there and
the type of demand has changed a little bit, too, because as Amazon and walmart and some of the larger retailers reach what I call maturity at the mega fulfillment center level (1million square-foot) facilities and larger they are seeing focus on the other nodes of it.”

Other types of nodes cited by Bjorson include sortation facilities that are 300,00 to-500,000 square-feet, adding that as it gets down closer to the urban delivery type center where they are in that 20,000-to-50,000 square-feet range.
These developments are indicative of the changes of how consumers are buying more products, especially online, today, with JLL seeing 30-to-40 percent of demand for industrial real estate having some type of connection to -ecommerce

“We are still riding the wave, and the economy and us as consumers are letting us ride that wave w the double-digit growth of e-commerce,” said Bjorson.

As for the byproducts of the sustained e-commerce growth and how that relates back to the industrial real estate market, he noted that retailers and logistics services providers are
deciding how close to place inventory to consumers, as there is continued pressure on things like where the product is, what is the desired service from the consumer and what is the delivery window.

“For many customers, we see this industrial urbanization going on and everybody seems to be getting closer to the customer and a lot of the activity whether it is being done by actual retailer or a third party for the retailer has been happening closer to the population densities,” said Bjorson.

When asked what the major challenges related to this industrial urbanization from JLL’s perspective, he said that it means there is an increase in trying to close industrial real estate deals closer to larger cities.

“In most of the major markets, it is very tight to get these deals done so whether it is a client using a 20-acre parcel in Chicago, you may have a client looking at that, as well as, for example, a company like FedEx Ground looking at that site,” he said. “So you are getting corporate and third-party service providers fighting for the same real estate and most of these major markets are running out of industrial space in certain areas.

There has led to heightened demand and land pricing heading, rising rents, and increased competition, as most of major markets run out of what Bjorson described as pretty close proximity for service locations.