Logistics Is Looking Up Despite Downturn Concerns
Investors are bracing for a downturn, and commercial real estate experts have been speculating for months about when the next recession could come — but professionals in the industrial and logistics world are drawing sunnier conclusions.
“It’s not even worth asking ‘what inning are we in,’ because we’ve never been in a ballgame like this,” CBRE Vice Chairman Chris Riley said. “We’ve seen nine successive years of exceptionally strong performance from logistics. Based on a traditional seven-year cycle, we would be overdue for a downturn. But with the fundamentals looking the way they do right now, this upswing could continue for two or three more years.”
The industrial sector refuses to stop posting record numbers. Nationwide vacancy for warehouse space is sitting at an all-time low of 4.3%. And though a whopping 200M SF of industrial and logistics space came to market in 2018, 299M SF was absorbed, according to CBRE.
The availability of industrial real estate has declined for 34 consecutive quarters. From a risk-adjusted basis, warehouses are the best bet investors have, which has made industrial space the darling of the CRE industry, Riley said.
He said a single trend is fueling the demand for industrial space: e-commerce. Giant fulfillment centers pour their contents into last-mile distribution centers near city centers, while reverse logistics warehouses fill up with all the packages consumers want to return.
“I’ve been working in the industrial sector since 1987, and I’ve never seen anything like it,” Riley said. “E-commerce is a game-changer. It's the biggest demand driver of all time.”
Riley cited his colleague David Egan, CBRE global head of industrial and logistics research, who estimated that for every billion dollars of e-commerce sales, the U.S. requires 1.25M SF of warehouse space. And with $507B in e-commerce sales in 2018, and e-commerce growing at 15% yearly, a conservative guess says the U.S. will use 761M SF of new warehouse space in 2019 solely for e-commerce purposes, which doesn't include the manufacturing and delivery of goods not ordered online.
With a demand driver as strong as e-commerce, developing space for logistics and industrial remains an attractive investment in 2019, despite what trends the industry has seen in the past, Riley said.
“People are used to a seven-year cycle,” Riley said. “But we have to come to terms with the idea that we may entering a whole new paradigm where the seven-year cycle no longer applies.”
Riley said recent industrial deals prove that the market is staying strong, and pointed to Prologis’s $8.4B acquisition of one of its main American rivals, DCT Industrial Trust. Prologis is the world’s largest owner of warehouse space, and Riley said no other company would be as keyed into where the logistics business is headed.
“Prologis not only has its finger on the pulse of the market — it’s really a proxy for the market itself,” Riley said. “If Prologis thought the market was entering a downturn, it could easily take a conservative investment strategy. The DCT merger was a huge vote of confidence for the logistics industry.”
The U.S. logistics industry is also seeing investment from global capital sources, especially ones from Canada, such as Ivanhoé Cambridge, and Asian sources like Mapletree.
The only disruption that Riley sees in the logistics market is the possibility of a trade war. He speculated that increased tariffs on foreign goods could slow the absorption of space in the U.S. logistics market as imports decline.
“We need to get the trade war figured out, but the usual headwinds that we would feel going into a downturn simply aren’t materializing,” Riley said. “Nothing I see now is evidence that we’re entering a new phase.”
Riley will moderate a panel on capital markets and the outlook for industrial sector with experts from Prologis, Blackstone and Ivanhoé Cambridge at NAIOP’s I.CON West 2019, June 5-7 in Long Beach, California.
This feature was produced in collaboration between Bisnow Branded Content and NAIOP. Bisnow news staff was not involved in the production of this content.