JLL industrial outlook shows slower growth amid strong market fundamentals

A report recently published by Chicago-based commercial real estate firm JLL states that even though the United States industrial real estate sector has been thriving in recent years, in the form of setting annual records for rents and low vacancy levels, 2019 could be a year in which the sector could press the pause button.

The JLL report, entitled “Industrial Outlook 2019,” is not short on reasons why that may be the case either, citing how amid modestly rising interest rates, there has been a cooling off in the U.S. economy in recent months, according to JLL’s economic research. It added that things are back to business as usual for corporations after an initial boost from tax reform, while tariffs and trade tensions are creating supply chain and market uncertainty, coupled with record-low unemployment and labor shortages working to keep companies from adding capacity in order to boost additional growth.

“We’re entering the late phase of the business cycle, but even a pause year in 2019 will have a silver lining,” said Craig Meyer, President of JLL Industrial, Americas, in the report. “We have an opportunity to close the gap between demand and supply of industrial property—and that gap is significant. Industrial vacancy is at a record low of 4.8 percent, even as new space comes online quickly.”

As for what needs to happen for companies to leverage the ongoing shifts in the market, JLL cited various factors, including access to data and insights and a “street-level” understanding of market-specific dynamics as the defining characteristics of successful providers, owners, investors, and occupiers.

JLL’s Meyer added that operators that are able to successfully combine knowledge, experience, discipline, and data-driven insights, are the ones that will be able to prevail in what he described as a slowing environment with an uncertain outlook.

Not surprisingly, one of the major drivers of industrial real estate growth, both now and into the future, citied by JLL is the continued emphasis on last-mile delivery by e-commerce and logistics service providers. It explained that operators will view total occupancy costs as “encompassing not just rents, but also the cost of inventory, transportation and labor for last-mile deliveries,” adding that last-mile delivery strategies will focus on locations where there is an intersection of population nodes and density in tandem with what it called optimal demographics for a unique customer base.

And it added that the most “savvy” occupiers will leverage data and analytics to assess if they more need physical storefront or fulfillment and distribution centers.

In an interview, Rich Thompson, JLL International Director, Supply Chain & Logistics Solutions, said that even should activity take a step back in 2019, industrial real estate remains the “darling” of the investor community right now from an asset class perspective.

“The reason for that is that there are still solid fundamentals that will continue to drive demand,” he said. “One of those fundamentals is e-commerce. Despite things like trade, tariffs, and uncertainty that exists all the time, the prospect of e-commerce continuing to grow as percentage of retail sales is a pretty good bet…with it currently around 9.5% in the U.S. and expected to grow up to 30% or more.”

E-commerce, at the moment, he said, is driving around 30% of total demand for industrial real estate, and as long as e-commerce continues to evolve and grow, Thompson said that supports demand for industrial real estate, with rents continued to expect to grow in the 4%-to-6% range, with vacancy rates still at historic lows.

“One reason there is not a lot of activity right now is that there is not a lot of available space,” he said. “In some markets, there is just a lack of good quality product for lease, so there is a lot of tightness in a variety of big markets, including Northern California, Seattle, and New Jersey.”

Even with tightness, Thompson said there will be growth in 2019, albeit not at as strong a pace as last year, nor will things be “gloom and doom” either. The market, he said, is starting to become a little more complicated with vacancy rates down and rents up and the availability of newer space being tightened.