The Industrial Real Estate Cycle Looks Different This Time Around, CBRE Research Head Says
LAS VEGAS — E-commerce has disrupted many segments of the retail sector, but it is also fundamentally changing the U.S. industrial market.
At this point in the cycle, industrial developers are typically building more space than the market can absorb, but that is not the case this time around, CBRE Global Head of Industrial and Logistics Research David Egan said.
"Not only are we not seeing excess supply, we're seeing demand outpace supply," said Egan, speaking Wednesday at the National Association of Real Estate Editors conference at the Planet Hollywood resort in Las Vegas. "We're getting a sense things are different this time."
The U.S. industrial market absorbed 223M SF over the 12 months ending March 31, according to Egan's research. During that period, developers completed 203M SF, and that imbalance has led to historically low vacancy rates.
Looking back decades, industrial demand has always tracked closely to gross domestic product, Egan said, because the amount of warehouse space users needed was directly correlated to the strength of the economy and consumer spending. But around 2013, a gap began to form, with industrial demand accelerating noticeably faster than GDP.
"2013 was a very significant year," Egan said. "Major e-commerce providers decided to go from low cost and low price to a little flexibility in price but best-in-class service. When we first started buying online, we were OK with a week or two, now that's unacceptable. In 2013 it started to get to three days and two days and now it's at same or next day, so they need more inventory in more places."
He also noticed a change in how e-commerce companies and other industrial users were handling their space decisions. In the past, warehouse location decisions would be delegated to regional managers, but recently, he said he has seen C-suite level executives making individual real estate decisions, a signal of how important the supply chain strategy has become.
Egan said he believes e-commerce is much more than a fad. He said 12% to 15% annual growth in the sector is sustainable for the foreseeable future, and the robust industrial demand that creates will be relatively recession-proof.
"This demand is somewhat immune to what goes on in the economy," Egan said. "It's not completely immune, as consumption slows some online sales will slow. But we're going to see more space needed to support sales even as the broader economy slows down."