Why Industrial's Trajectory Will Keep Surging

US commercial property price growth continued its upward trajectory in February with all four major property types posting double-digit annual price growth, according to Real Capital Analytics.  

Leading the way was the industrial asset class, whose prices climbed 28.5% from a year prior, the fastest annual rate among the major property sectors in February and a record for any property type since the inception of the RCA CPPI, RCA’s Michael Savino wrote. 

It is easy to see why. Tight market conditions and rising land and construction costs in many markets and port cities led to limited development limiting new supply while demand for industrial warehouse space has continued to grow, Eli Randel, CREXi Chief Strategy Officer, explains. “In some instances, industrial space is being taken offline and converted into other uses. The result is tight market conditions, quickly growing rental rates, and increased investor appetite for product,” he tells GlobeSt.com.

Other metrics also illustrate industrial’s strength. 

For instance, John Worth, EVP, research & investor outreach, Nareit, says that industrial has been one of the strongest REIT performers over the course of the pandemic. From Feb 2020 through the end of last week, industrial REITs are up 60%. Industrial REITs gained 62% in 2021. YTD in 2022, the industrial sector is down 8.6%, but so far in March, it is up 6.7%.

“Industrial REIT earnings have supported these valuations,” he tells GlobeSt.com. “Industrial REIT FFO grew 24% in 2021 compared with 2020. Compared with 2019, the last year prior to COVID, it is up 37%. The strong performance of the industrial sector is supported by increased consumer demand for e-commerce including omni-channel shopping. Looking ahead as businesses account for changes and challenges in the global supply chain, we may see increased demand for stockpiling materials and finished goods.”

But will this growth story continue? 

Perhaps not at the heights seen in the last year, at least according to the Pension Real Estate Association’s first quarter consensus forecast survey, which was reported in Pensions & Investments. Investors expect industrial returns to post 14.8% growth in 2022 and drop to 8.2% in 2024. However, industrial is still expected to be the top-performing property type in 2024, the survey shows.

There are several factors that will be driving this growth, experts tell GlobeSt.com, many of which took root during the pandemic. 

The Pandemic ‘Activated Trends’

Grant Puleo, a partner at Duane Morris who focuses on a wide variety of real estate transactions, tells GlobeSt.com that the Covid pandemic accelerated trends that were already beginning to influence the commercial real estate market.

“One significant trend is remote working, which appears to be here to stay,” Puleo said. “While demand for office, retail and hospitality properties—especially in urban markets—should continue to decline into the foreseeable future, this trend does not seem to be affecting industrial properties to the same extent.

“The inability of industrial workers to work remotely, E-commerce—especially grocery delivery—data storage and other trends that accelerated as a result of the Covid pandemic appear to have positioned industrial properties to continue to outpace other sectors in a post-Covid world.”

E-Commerce Makes Biggest Impact

The pandemic also ushered in changes in consumer behavior such as the online ordering of everyday goods, Peter C. Lewis, chairman and founder of Wharton Industrial, tells GlobeSt.com. “The pandemic also  introduced many people who had never shopped online to the wonders of e-commerce. That can’t be undone.

“Combine this with an increasingly critical lack of supply in and around the country’s major urban centers, and the industrial sector just continues to boom.”

Covid also prompted consumers to start spending again on goods instead of experiences, By Cartmell, senior director, Walker & Dunlop’s capital markets group, tells GlobeSt.com. 

“Goods need to be stored before they are either delivered to doors or stores,” Cartmell said. “E-commerce takes up to three times the square footage to get a physical good into a consumer’s hands than retail stores do. So even though 85% of retail sales are still delivered through brick-and-mortar stores, a small increase in e-commerce has had a disproportionate effect upon the need for warehouse space.”

COVID, Russian War Wreck Supply Chain

Another unforeseen driver has been the disruption in global supply chains. This has forced companies to adopt new inventory strategies, shifting from ‘just in time’ to “just in case,’ an inventory surplus model that requires additional warehouse space to effectively maintain, Anthony Amadeo, vice president of Woodmont Industrial Partners, tells GlobeSt.com. 

“The shift led industrial tenants into a leasing frenzy, pushing warehouse vacancy to unprecedented lows and rents to all-time highs, creating what is the leading and most stable commercial real estate asset in our post-COVID world.”

Now the Ukraine-Russia war is adding to the disruption in the international supply chain, says Peter L. Curry, Esq., Farrell Fritz, P.C. “We are starting to see industrial space being utilized again for parts and raw goods,” he tells GlobeSt.com. “Corporations that have dedicated their manufacturing processes to ‘just in time’ completion of goods are taking a fresh look at maintaining inventory to shield themselves from the effect of global logistical bottlenecks.”

Grocery Delivery Adds to the Need

Perhaps the most compelling example for the growing demand for industrial properties has been the increased adoption of grocery delivery services.

“Prior to the past two years, it was almost unheard of to order your groceries online and have them delivered to your home,” Courtney Smith, senior project manager, Newcastle Partners, tells GlobeSt.com. “In two short years, adoption has skyrocketed and the majority of us have at least tried out this service. This is one of many examples that illustrate how purchasing power continues to shift towards uses that amplify the demand for more industrial products.”