Thursday, January 5, 2017

INDUSTRIAL OUTLOOK: Despite Trade Uncertainty, E-Commerce Growth Expected to Further Boost Distribution Property Growth in 2017

Industrial real estate's unprecedented bull run is expected to continue well into 2017 as both importers and exporters continue to seek warehouse and distribution centers close to major seaports and inland hubs, while increasingly venturing out to secondary markets.

Fitch Rating expects booming e-commerce sales to support the current industrial property upcycle, with growing demand from e-tailers willing to pay a premium for efficient, well located fulfillment space versus the less efficient racking requirements of traditional warehouses and distribution centers.

With demand for industrial space continuing to exceed supply, retailers and other cargo interests should anticipate tight space, rising rents and fewer options in primary locations near seaports and inland hubs. Space is especially tight for the highest-quality Class A properties in those markets, forcing some shippers to consider class B locations. Alternatively, they will have to go farther out into adjacent markets to find the quality sites and structures they need.

While president-elect Trump’s trade and financial policies are anything but clear at this point, what is known has mixed implications for the industrial real estate sector. Trump’s potential plans to rebuild infrastructure, increase defense spending, deregulate the energy sector and encourage domestic manufacturing could benefit industrial tenants.

While fears over global trade wars may be overblown, reduced trade flows and any ensuing economic slowdown could hurt the broader industrial sector, especially port-oriented warehouse and distribution markets. However, the continued shift to e-commerce and the overhaul of the U.S. logistics network promises to outweigh all the other factors.

Meanwhile, still-low interest rates, healthy consumer spending and strong e-commerce are forming perfect conditions for industrial and logistics real estate growth in 2017. Potential investment in infrastructure and continued company expansion are also expected to fuel demand for warehouses and distribution centers despite global economic uncertainty.

"We are leaving 2016 on a record high, with industrial real estate demand reaching new heights, with leasing in excess of 250 million square feet. Many companies continue to expand while others adapt and perfect their supply chains to be closer to urban cores and their customers, driving record low vacancy rates even further and increasing leasing rates in response.

"With new construction still trailing demand, not only will we see ground up development across major markets, but we will see creative and adaptive re-use of assets, a rise of infill development and the introduction of multistory construction in or near urban locations," he added.

Five Factors Driving Demand in 2017

"The only safe prediction for 2017 is that many things are going to change. There are numerous factors that could impact the freight movement industry next year and beyond, ranging from changes in trade policies and regulations to specific issues that affect how goods are transported. However, the need for infrastructure investment and the continued proliferation of e-commerce will keep industrial real estate booming."

They identified five factors that will impact the sector in 2017, led by the potential for long-delayed investment to revive America’s infrastructure. The urbanization of U.S. cities cannot continue with functionally obsolete roads, bridges and other infrastructure; and as upgrades are planned, raw materials will be needed and warehouses to store them.".

"Investing in the Rust Belt's infrastructure would mean reviving dozens of Mississippi waterway terminals that served a dated American manufacturing-based economy. Already zoned for industrial use, these ports are being repurposed to transport materials needed to build infrastructure for new industries driving the U.S. economy.".

Secondly, online shopping and consumer demand for rapid delivery this year is expected to continue to compress the national industrial market vacancy rate, which reached a 16-year low of below 6% in the second half of 2016, as industrial tenants expand their presence in new markets.

Institutional capital still views industrial real estate as a lucrative investment opportunity, with year-end 2016 industrial investment sale volumes potentially reaching upwards of $45 billion, the second-largest annual tally since 2008.

Finally, unprecedented industrial real estate demand and the push to improve last-mile delivery services may influence development throughout the country. Smaller urban core warehouses and fulfillment centers, reconverted assets and multistory warehouses could become last-mile solutions for many companies in 2017
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