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Don’t Be Surprised When Demand Slows In Industrial Real Estate This Year

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Though e-commerce continues to power industrial real estate to record levels of occupancy and peaking rents, the general consensus among industry experts is that the sector may slow down this year.

Logistics, warehouse industrial
A distribution center

The anticipated growth deceleration will have little to do with economic factors. Demand continues to outpace supply, and major retailers and users persist in their scramble for warehouse and distribution space nearer to customers. Investors have been favoring the sector, so it's been experiencing record levels of acquisition spending and low cap rates.

After such a long period of expansion — in Q3 the sector hit its 26th consecutive quarter of record net occupancy gains — it's inevitable demand will plateau. "There is some concern about how much longer the strength of the demand can continue,” CBRE head of industrial research in the Americas David Egan told Bisnow. “So many users have been actively in the market for so long, but there’s going to be a point where they’ve managed to employ their strategy, and demand will slow down. This is not because the market is bad; users will simply be satisfied with the supply chain and real estate decisions they’ve made, and will wait and see what happens.”

Https://www.flickr.com/photos/mikeblogs/2507355507

“I think 2017 is still going to see rising rents and supply-demand imbalance that will lead to shrinking vacancies, but the magnitude will get a bit smaller this year,” Egan said.

One of the greatest factors likely to positively impact the sector is projected growth in GDP, he said. Economists and Americans in general are expecting President-elect Donald Trump’s plans for fiscal stimulus and business-friendly policies to boost the economy. CBRE has raised its economic forecast to 3.5% from its pre-election forecast of 2% to 2.5% economic growth.

As for e-commerce being the driving factor behind industrial real estate? Egan said that will not change. No matter the state of the U.S. economy or the impact of global disruptions on the sector, technology has forever changed the fabric of industrial real estate.

“The deepening of the supply chain and the idea that users need to be as close to the customer as possible, that’s been the conversation for the last several years and that’s still the conversation,” Egan said. “That’s not cyclical, that’s structural … the world will change but this structural layer of e-commerce demand isn’t going to.”

Related Topics: CBRE, e-commerce, David Egan