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Since the pandemic started affecting the U.S. economy last March, industrial real estate has proven to be the bright point in an otherwise challenging real estate market.

As part of CommercialCafe‘s Expert Roundup series, a number of commercial real estate experts from across the country give their takes on why the industrial asset class is so resilient, what challenges it still faces, what the near- to mid-future has in store and even break it down to a regional perspective.

Industrial construction projects in the U.S. are projected to eclipse 342 million square feet in 2021 – the highest in five years. What are the main drivers of this expansion?

Grigoriy Azayev

The main drivers of the accelerated expansion we see in industrial construction projects in the U.S. and abroad are the following:

Due to stay-at-home orders and lockdowns throughout the U.S.,people had no choice but to shop online for household products, clothing,equipment, and food. The e-commerce and last-mile delivery trend has beenemerging rapidly for the last five years, but the pandemic accelerated growth and demand to numbers and targets that no one in the industry expected to see until 2030 (ratio of online sales vs. in-person retail shopping and dollar amountsspent online in purchases).

But the writing was on the wall for quite sometime pre COVID 19..The retail experience has changed dramatically in the last 10 years, and year-over-year,less Americans go to physical brick and mortar stores for everyday consumer goods. Instead, they’re opting for online platforms which have been improving their ease of use, variety of products, and most importantly: delivery speed. It doesn’t pay to get in the car and drive 30 minutes to the store, walk around the store for an hour putting your goods in the cart, and then driving backhome, if for the same price, I can click a few buttons and have all my goods delivered – sometimes as quickly as 2 hours. 

Steve Buss

Right now, three major factors are driving industrial demand — the rise of e-commerce; manufacturing growth due to reshoring; and supply-chain diversification. All three were accelerated due to the pandemic..

E-commerce was a huge driver of industrial real estate expansion before the pandemic and — after a short pause initially in 2020 — it’s only expanded in cities of all sizes.

Industrial real estate demand is a natural reaction of the marketplace, which has doubled down on online sales — not just business to consumer, but also B to B. Corporations are expanding how much they’re willing to buy via e-commerce just like household consumers.

We’re living in a world where competitive delivery pressure is ratcheting up every day. Everyone needs to find warehouse space to help them deliver goods to their customers. They want to offer expedited delivery and develop last-mile e-commerce supply chains to compete against giants like Amazon.

Fulfillment and third-party logistics companies are increasingly in need of distribution centers within a short distance of urban and suburban areas. That’s not going to change. Demand is only going to grow, especially in secondary and tertiary markets. In-fill industrial — as well as new construction — will continue to grow in 2021.

Will Curtis

The biggest things that has driven the growth in industrial is online shopping and the changes in the consumer purchase process. Between delivery driving the need to last-mile distribution to the click and pick up has increased the need for warehouse space for retailers.

The other thing that is adding to this trend is the move to suburban office space and looking at flex properties to combat COVID concerns like shared common areas, elevators or shared HVAC systems. Flex buildings have the ability to mitigate those issues and have driven the demand for more industrial demand.

Fletcher Dilmore

One of the main drivers of this expansion is that traditional big box retailers are conceding market share to online retailers, creating increased demand for industrial warehouse and fulfillment space from these growing online retailers who do not have a traditional physical presence.

Michael Edwards

Construction on industrial projects is booming, because we’ve seen consistently that despite periods of economic uncertainty or even crisis, industrial properties tend to remain stable. This means consistent cash flow and reliable investment growth. Industrial may not be the sexiest part of the real estate industry, but it might be the steadiest right now.

Additionally, sectors like e-commerce, data centers, and self-storage have recently seen higher-than-normal demand, and low supply. The onset of the COVID-19 pandemic accelerated the need for infrastructure to support these industries.

Max Levinston

Industrial was already growing at a fast pace before Covid, and this pandemic has accelerated many of these trends. In our market warehouse space either for sale or lease is quickly absorbed, both by investors and owner users.

Bruce Lowry

In our experience, the drivers in construction has two main drivers, (1) increased demand for warehouse space in general and (2) the lack of modern industrial and warehouse space. Increased demand for industrial warehouse space has significantly increased over the past several years as consumers have increasingly changed their purchasing habits from brick and mortar in person purchases to online orders with door step delivery. The global pandemic has increased this demand for door step delivery of online goods and services including perishable goods such as groceries.

Older consumers were forced to learn new technology and they are learning that they like the convenience of door step delivery. In turn, this increased demand for online ordering and door step delivery has increased the demand for both large warehouse projects and so called last mile warehouse space.

Secondly, outdated building infrastructure including lack of access to technological innovations such as communication and data infrastructure, buildings designed for automated sorting and delivery systems are increasing demand for newly constructed warehouse and manufacturing space. Buildings with narrow spans containing repetitive floor to ceiling support structures simply will not accommodate modern automated manufacturing and warehouse logistics systems and these buildings are being replaced with structures that contain these innovations.

Bryan Shaffer

E-commerce sales was growing before the pandemic, but the crisis accelerated this trend, with consumers unable to obtain goods from some retailers. Further, it was harder for manufacturers and sellers to get their goods to the market therefore many small suppliers have partnered with Amazon to keep their distribution line open. Overall, year over year industrial values increased 8.1% from February 2020 to February 2021, more than any commercial real estate asset class. The E-commerce sales resulted in much stronger demand for logistics and more demand for cold storage space.

 

Industrial real estate has fared better that other asset classes in the last year. How has 2020 affected the industrial market this year and beyond?

Grigoriy Azayev

The industrial market in 2020 has become the sweetheart ofCRE. Everyone is chasing industrial deals and some of the biggest players inother asset types are jumping ship to bid on industrial deals. Unfortunately,it is creating a supply shortage in the market throughout the country, and prices for both leases and investments are on the rise. I don’t see this trend slowingdown because companies like Amazon have publicly stated they want to doubletheir square footage in the next year and are paying top dollar for class A industrial space and land. Regrettably, it’s weeding out the little guys and small-to-mid-size businesses that also rely on supply chains and logistical real estate.

Steve Buss

Another huge factor driving demand for industrial real estate is a much greater awareness of supply chain risk, which was exposed due to the pandemic shutdowns. Shortages of all types of goods revealed just how tight supply chains were for many sectors. For example, some U.S. automakers weren’t able to operate because they couldn’t get onboard computer chips. That led to sustained automotive inventory shortages. Until the pandemic, that was an unseen or under-rated risk in the supply chain. Now, it’s impossible to ignore such risks. Businesses are diversifying those supply chains and rethinking how they manage risk, including where they want to store finished goods.

While it’s typically more profitable to run a really tight supply chain, businesses faced a rude awakening and discovered it’s also much riskier. Businesses and their customers found they were taking on far more risk than they realized by holding very little inventory. They weren’t ready to handle the supply chain disruption. Now, they’re asking how much more inventory they should have on hand to make it through the next supply disruption.

Will Curtis

Certainly of returns is always going to drive investments. With large players like Amazon, Walmart, and others that they need additional warehouse space has added to the investment-grade properties and brought in more demand.

Fletcher Dilmore

2020 has made industrial real estate an essential asset class. Distribution and warehousing went from being apart of everyday business to being the everyday business. Had it not been for the pandemic, I think it is safe to say we would not have seen as quick of an adaptation of online grocery shopping, something that had been available, but was a minuscule amount of overall grocery sales in previous years. 

Michael Edwards

2020 was quite a year – and it was fascinating to see the shifts in the real estate industry. In commercial real estate in general, most markets saw a decline in demand – but industrial saw a significant increase in growth and investment. We anticipate that investors will be eyeing industrial properties favorably in the months ahead.

Part of the reason for this growth in industrial investment is the consumer behaviors that accelerated e-commerce and data centers when the pandemic rocked our worlds last year. Grandparents who’d never ordered anything online before were suddenly getting groceries delivered and medications shipped and birthday gifts sent directly to their kids and grandkids from fulfilment centers. We expect this trend to continue, so demand will remain for the industrial properties needed to support those activities.

Max Levinston

Online shopping has been a huge reason for the increased demand. Many of these shifts in consumer shopping will not revert back once we’re further out of this pandemic.. 

Bruce Lowry

The industrial and warehouse real estate market is strong and the demand for new industrial and warehouse properties across all sectors will continue as companies innovate and automate their manufacturing, logistics and delivery programs. We see only increases in this sector for the foreseeable future due to high consumer demand for e-commerce goods and the need to continue to automate manufacturing facilities.

Bryan Shaffer

The pandemic forced people to adapt to E-commerce. It likely pushed forward the market in the US by 5-10 years. People who were possibly thinking of looking at eCommerce were forced to utilize it during the pandemic to receive their needed supplies and services. In addition to industrial logistics demand, the vaccine also created more cold storage space. New technology has also developed quicker because of additional capital being invested in this space.

 

Are there any other use-types besides e-commerce and cold storage that you see expanding more in the future?

Grigoriy Azayev

We’re starting to see some secondary uses come into play,such as fleet parking for delivery providers and there has is a growing demand for movie studios and film production campuses in New York City. This is due to some excellent tax incentive programs for film production here and tremendous demand growth for instant and fresh content. There is also movement in the smaller “maker spaces” and manufacturers here in New York and other cities. The costs of shipping andoutsourced manufacturing on the rise, paired with long delays of production due to COVID-19, the cost of manufacturing in the U.S has become comparable to outsourcing due to a growing supply chain. It has become more and more seamless and cost-effective to manufacture all types of goods here in the states.

Steve Buss

Another issue that will drive industrial real estate in the years to come is reshoring or bringing manufacturing operations back to the U.S. Because of the pandemic supply chain issues, some companies are less convinced they want all their goods coming from one country like China if they can find local alternatives.

Will Curtis

In San Antonio, we are seeing a huge push for Cyber Security. Flex space is showing as a great cost-effective option compared to traditional office buildings. Cyber Security SCIF (Sensitive Compartmentalized Infrastrcture) is expensive to build out and flex gives a lower-cost option. Things like Port San Antonio has been a huge driver for the growth in San Antonio.

Fletcher Dilmore

I have seen an increase in demand in my local market for smaller flex space by tenants that have a specialized manufacturing or business specific needs.

Michael Edwards

Data centers, undoubtedly, will continue to grow in importance and their needs will evolve along with the technology that’s stored inside them. We’ve also seen self-storage grow over the past few years as a result of more people moving to smaller homes in urban settings. And, self-storage is a sector that tends to resist the overall trends during economic slowdowns – including this COVID-related one. More people than ever before are “working from wherever”, which means they can put their things in storage and hit the road.

Max Levinston

Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.

Bruce Lowry

Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.

Bryan Shaffer

Industrial overall is very affordable to build. Over time I expect to see an over-supply. This usually happens with real estate asset classes after they become over heated. I believe that e-commerce will drive more activity and offer a hybrid space between industrial and retail and logistics space will be incorporated into current retail properties. Walmart is an example of a brand where we are seeing this trend now.

The other likely impact on industrial will be the emergence of more food service, commercial kitchens, located within industrial properties, which will service the food delivery companies.

 

What’s the #1 challenge industrial is facing in 2021?

Grigoriy Azayev

The biggest issue that industrial real estate faces is beinga follower of the market rather than the leader. It’s great that Amazon candeliver my package to me in under 2 hours here in NYC from one of their manyfacilities, but if workers don’t return to the office and come back to living in the city, to who will they be delivering these packages? At the height ofthe pandemic, vacancy rates in NYC for residential buildings touched 25%, and to-date,offices are still at 15% occupancy. These huge investments into last-miledelivery will be a tremendous loss if the theme continues and people don’treturn back to NYC.

The second issue is more industrial real estate leads tomore air, water and noise pollution, and a substantial increase intraffic. In NYC, there is scarce industrial space and they depend on only a fewmajor roads that trucks can go on to reach the facilities. There are more andmore trucks and vans on the road, causing ridiculous traffic, and it’s alreadybecome an ongoing concern in the city.

Steve Buss

Industrial real estate is one of the few big winners of the pandemic. We see enormous investment potential in industrial properties due to the expansion of e-commerce and the growing demand for warehouse space. We’re expecting growth not just in big cities, but also in secondary markets, particularly in the Midwest.

For tenants looking for industrial properties to lease, it’s very competitive. It’s hard to find space. Due to high demand, industrial rents are going up. When tenants get ready to renew their leases, they’re getting sticker shock. They’re not used to that. That all means, of course, that industrial real estate is a particularly sound investment.

While many bigger box distribution centers are going up in the biggest markets, we see huge potential for developing or building smaller industrial properties closer to urban centers in secondary and even some tertiary markets. You can find 20-, 30- and 40-year-old buildings in excellent locations and make them very functional for multiple tenants. If you stay near urban centers, you can deliver last-mile supply chain accessibility, but also access to workers.

Will Curtis

Lack of inventory and pricing smaller users out of the market. I am working with a client now, who is more price-sensitive and we simply can not find space and the few things we do find are more expensive than what can be unwritten into the business plan.

Fletcher Dilmore

Keeping up with demand with functional product. Industrial has been the safe haven for real estate investors during COVID, but that doesn’t mean all industrial product is created equal or as equally valuable. There are many industrial buildings across the U.S. that are for practical purposes functionally obsolete. This can be because of low ceiling height, inadequate power supply, difficulty moving trucks in and out, lack of proper sprinkler systems, distance from major transportation arteries, etc.

Michael Edwards

We feel really optimistic that challenges will be few for industrial properties this year, at least relative to the opportunities in this part of commercial real estate. But it will be interesting to see how many people miss shopping in brick and mortar stores or having face-to-face interactions, cutting into the growth of e-commerce. We don’t expect that to happen, but it’s something industrial investors should be looking at.

Max Levinston

Supply, the availability is between 1 – 2% right now for quality industrial space, both for lease and for sale.

Developers cannot keep up with the demand which has also caused the prices of industrial land to go up as well. We’re seeing the prices/sq ft go up and some buildings getting leased before construction is completed.

Bryan Shaffer

Developers will race to add more industrial and flex inventory to the market because of the lower cost compared to other types of real estate and the current low vacancy rates. At the same time, overall changes in the retail market caused by e-commerce, will lead to more repurposing of existing better located retail properties into some type of hybrid distribution/ retail projects. Both factors together can lead to oversupply in some markets. Markets with higher land cost and more limited development opportunities will out preform markets with unlimited expansion potential. The long-term need is going to be for better located properties closer to shipping and population centers This will ensure that products can be delivered quicker. For 2021, I believe industrial will overall remain very strong, but the new growth in development may hurt the asset class in the future.

 

Source: CommercialCafe

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Long before the novel coronavirus pandemic sent Americans racing for their smartphones to order groceries, industrial real estate observers were keeping a close eye on the availability of temperature-controlled warehouses.

Covid-19 vaccines that require very specific temperatures — Moderna Inc.’s vaccine requires temperatures of minus-20 degrees Celsius and Pfizer Inc.’s candidate requires storage at minus-70 degrees Celsius — have put cold-storage warehouses in the spotlight in recent weeks.

But the sector has seen little vacancy for years, and industrial real estate experts don’t expect that to change as consumers shift more of their food shopping online, even after the pandemic is in the past.

Historically, the national vacancy rate of cold-storage warehouses has hovered below 10%, according to JLL, and much of that inventory is aging and rapidly approaching functional obsolescence. The average cold-storage warehouse in the U.S. is 42 years old, according to JLL.

“If we have a client who wants to know all the available temperature-controlled storage in the U.S. … on any given day, this isn’t something that takes up 10 pages,” said Tray Anderson, Cushman & Wakefield Inc.’s logistics and industrial lead for the Americas. “It’s more like two or three.”

The lack of available space is a function of economics: Temperature-controlled warehouses cost nearly twice as much to build as their dry-storage counterparts, according to JLL, which forecasts that those construction costs will only rise as demand intensifies. A temperature-controlled warehouse can cost $130 to $180 a square foot, whereas construction costs for a conventional warehouse range from $70to $90 a square foot.

“That pricing makes speculative construction — breaking ground without a signed tenant in place — difficult but not impossible,” said Anderson, who is based in North Carolina.

But the uptick in demand from food companies and retailers — coupled with the variable of a massive vaccine-distribution effort — is enough to embolden some developers to try their hand at speculative construction. Already, 95% of U.S. food goes through a third-party distribution center before it reaches consumers, according to CBRE Group Inc. And as early as May 2019, CBRE predicted that the country needed an additional 75 million to 100 million square feet of cold-storage space to meet demand for direct-to-consumer food orders — and that was before the pandemic threw online ordering of everything from furniture to food into overdrive.

“JLL is tracking more than 20 speculative cold-storage developments,” said Dustin Volz, a managing director on JLL’s capital markets team who specializes in such properties.

Cold-storage properties tend to be specific to individual users, but Anderson said projects could at least begin construction by pouring a floor that can handle a specific temperature.

“Speculative cold storage is still challenging, but a few select developers are figuring it out,” said Volz, who is based in Dallas.

Vaccines for the novel coronavirus aren’t expected to drive much additional supply for cold storage because the goal will be to administer the vaccines quickly. What that might do for short-term demand for space is another matter.

“The growth we’re talking about isn’t really vaccine-related; it’s food,” Anderson said. “Especially at minus-20 degrees … Minus 20 is much more common with pharma and food. You can find space that can do minus 20. You’re not going to find any vacant space at minus 80.”

Volz agreed that food is driving the majority of the demand — and that the pandemic highlighted weaknesses in the U.S. food supply chain, such as its reliance on international vendors and inability to handle sudden upticks in demand.

“The need for excess warehouse space is therefore a result of keeping additional inventory to handle any surges in food demand,” Volz said, “and maintaining a domestic supply chain with the unrestrained geographical access for the population with supplemental food imports to complement the new infrastructure.”

 

Source: SFBJ

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A key component of a successful real estate investment is choosing the right asset class to invest in within the given market.

Supply and demand is constantly changing, meaning what was a lucrative investment one, two, or 10 years ago may not be worthwhile today. See what types of real estate are in high demand right now and how investors can participate in the growing market.

Before we dive into where opportunity lies, note that just because there’s a general demand for these types of real estate doesn’t mean there’s opportunity for them in every market. Real estate is a very localized business that operates on a macro and micro level. For active investors, it’s important to identify what opportunities lie in your local market or participate in a more diversified investment portfolio specializing in these asset classes through a real estate investment trust (REIT).

1. Cold Storage

Cold storage is a type of industrial real estate responsible for the storage and transportation of cold goods, including food products. The global pandemic interrupted the food supply chain, making consumers and large grocery retailers adapt to the shift in consumer preferences for online grocery sales as well as the need for more cold storage as a whole.

This specialized niche has several barriers for entry, making it a difficult asset class to invest in outside of Americold Realty Trust (NYSE: COLD). Americold is the only industrial REIT specializing in cold storage, owning more than 1 billion cubic feet of cold storage space. The company is well positioned financially to grow with the increased demand.

2. Data Centers

We are undoubtedly in the age of technology, with more people and products becoming reliant on the efficiency, ease, and convenience of technology. Data centers are responsible for safely storing and computing data for the government, large corporations, cloud companies, and even data used from phones.

Demand for data centers has been on the rise over the past decade, but COVID-19-related work-from-home orders have put even more pressure on this growing sector. While demand as a whole is up, certain markets are leading the sector, including northern Virginia and Atlanta.

Data centers are another unique sector to invest in with large barriers for entry, making any of the top data center REITs a wonderful way to participate in this industry.

3. Residential Housing, With Emphasis On Affordable Housing

A study conducted by Freddie Mac found that the U.S. is short 2.5 million to 3.3 million housing units in 29 states, with states like Oregon, California, Texas, Minnesota, Florida, and Colorado the leaders in the housing shortage. These states, among others, are also home to some top-tier markets, where housing prices far outpace wages for the area, putting affordable housing in serious demand.

This means multifamily properties, single-family homes, and new construction can potentially be good investments in the right markets. This asset class is the easiest point of entry for investors, with dozens of options available to participate in actively, like fix-and-flip or rental properties, or passively through residential REITs.

However, it’s important to note that with current eviction moratoriums and a record number of tenants being unable to pay rent, the rental industry is facing tough times, making this a volatile market to participate in right now as a smaller investor. However, this industry is fairly resilient, and while it’s currently facing unique challenges, this market clearly has long-term demand and should bounce back in time.

 

Source: The Motley Fool

As part of Colliers International South Florida’s annual Industrial Owners Forum, more than 50 institutional owners gathered in Miami.

They converged to take part in a closed discussion on the state of the industrial market in South Florida, where they own properties.

Steven Wasserman, executive vice president of the Colliers International’s South Florida industrial services team, hosted the forum. He sat down with GlobeSt.com to highlight the main takeaways from the discussion and the sentiment these influential leaders have about South Florida’s industrial market. In part two of this exclusive interview series, he spoke about evolving industrial market trends.

“There’s still a lot of excitement surrounding e-commerce and the impact it’s having on brick and mortar retailers,” Wasserman tells GlobeSt.com. “While many retailers are downsizing their retail stores, there is a growing demand for distribution space as consumers are buying their products online. Distribution centers near urban cores are in high demand.”

Wasserman pointed out another trend shaping the industry: construction costs. Construction costs have been on the rise, but he expects they will most likely remain flat in 2017 as the condo construction market slows down.

“Institutional owners expect the cost of labor and construction materials to start to level off after years of increasing costs,” Wasserman says. “New development construction costs are ranging from $70 to $100 per square foot for new class A warehouse space and will most likely remain at that price throughout the year.”

On the other hand, he says, cumbersome environmental and permitting issues continue to slow the construction process down. That is forcing tenants to holdover because space takes so much longer to build out in South Florida.

Another topic of discussion was the trend of parking requirements. Institutional owners discussed the significant increase in employee and trailer parking requirements for all sites nationwide, especially “last mile” sites.

“This used to be a requirement from larger tenants but they’re now seeing it from smaller tenants in the 80,000-square-foot range,” Wasserman says. “We’re also seeing growing demand for cold storage facilities. As population continues to increase and lifestyle patterns change, we’re seeing increasing demand for cold storage facilities. This particularly true in South Florida where suburbs are becoming urbanized.”

 

Source: GlobeSt.