By: Matt Dolly
June 16, 2023
Despite a host of economic issues putting pressure on commercial real estate (yes, even industrial feels the squeeze), the sentiment at NAIOP’s most recent conference wasn’t much different than what we’ve experienced for years now: Industrial remains a favored asset class, and there is significant runway ahead.
That’s not to say the sector is immune to headwinds, as narratives throughout the conference underscored. Large new developments that two years ago would have been fully pre-leased by a single tenant today require more creative marketing, more flexible lease terms and, in many cases, owners that are willing to subdivide space.
It’s true, the euphoria has subsided to some degree. But whether or not the economy slips into a shallow recession will not change the trajectory of industrial real estate. Those who are thinking about the future today will be best positioned to lead. Take, for example, these initiatives already underway:
A push for solar-ready warehouses. Some developers now consider this an important feature of a modern warehouse and are ensuring future projects, where practical, are structurally capable of supporting the weight of solar panels. It’s cheaper than electrification, and hosting solar owned by a third party via a roof lease can add a new revenue source for property owners. True, tenants today may not give this feature as much weight in decision-making, and the premium on these buildings is still mostly anecdotal due to limited transaction volume. However, there is some concern that growing regulations across the U.S. could result in properties being too expensive to retrofit down the line. Europe, for example, which has stricter ESG regulations, has experienced “stranded” industrial assets due to this limitation. As community solar programs expand across the U.S., and ESG strategies mature, tenants may be more drawn to these assets.
Transportation programs to support workforce retention. In part due to the tight labor market, more companies are addressing the very real problem of the last-mile commute, which prevents many able-bodied workers from taking positions in distribution facilities that do not offer easy access to public transportation. Public-private partnerships with universities and government entities are demonstrating the success of investments in bus service or ridesharing by which workers can efficiently and cost-effectively get to the workplace in a reasonable amount of time. As a result, worker satisfaction rises, and retraining for open positions is less of a burden on employers.
Design changes to improve throughput. This includes everything from rethinking floorplans to integrating automation to experimenting with new types of racking. It’s universally recognized that flexibility is as important – if not more important – than square feet, and developers who follow a traditional blueprint may be missing ways to dramatically improve supply chain efficiency and speed to customer. Thinking creatively also reopens the door to sites that previously may have been deemed impractical or cost prohibitive.
New considerations for site selection. Companies are shifting away from port-adjacent markets to those that offer more appealing cost and vacancy options – for example, from Los Angeles to Phoenix, Fresno and Las Vegas – as well as targeting high population growth areas in the Sun Belt. Workforce availability has become of paramount concern in location decisions (though the accelerated adoption of automation has addressed some labor scarcity issues), closing the gap on the No. 1 site selection consideration: transportation costs. Additionally, onshoring and nearshoring are now a reality as the CHIPs Act and other factors have sparked a manufacturing revival in the U.S., and companies are increasingly seeking strategies to build supply chain redundancy and reduce dependence on China.
So, while it was a fabulous run, a slight pause in market activity gives all players across the sector a chance to catch their breath, rethink goals and solutions, and prepare for what comes next. Analysts anticipate at minimum five more years of rent growth for the U.S. industrial sector, especially with construction starts decelerating, as the chart above demonstrates. Furthermore, the field of tenant types leasing industrial space– more pharma, cold storage and even data centers, to name a few – is expanding. Investors, 3PLs and tenants alike must be ready to capitalize on the next wave of consumer demand and innovation.
Matt Dolly is Research Director for Transwestern’s Industrial Group and the firm’s Strategic Account Management program. He delivers local and national commercial real estate and economic trends, analyses and reports to team members, clients, prospects and the media.
- Pandemic Swings the Port Pendulum
- Transwestern Development Co. Delivers 454,600 SF Industrial Facility in Greater Houston
- Transwestern Secures 227,300 SF Lease at New Houston Industrial Facility
- Forecasting the Future of Warehouse Demand
- South Florida’s Resilience