4 Economic Trends That Will Impact Industrial Real Estate
The U.S. economy is growing, technology is improving and political struggles are brewing. All will have a direct impact on industrial real estate in the coming months.
As e-commerce gains a greater market share of retail spending, warehouses are in high demand in urban areas near customers. Meanwhile, automation stands to change how goods are packed at facilities and shipped long distances. Amid the positive development, the threat of a trade war and rising interest rates have sparked concern among commercial real estate professionals.
Prologis CEO of Europe and Asia Gary Anderson is at the forefront of industrial real estate activity. Anderson sat down with Bisnow to discuss four global economic trends that could shape the industry.
1. A possible trade war
In early March, President Donald Trump signed two proclamations levying tariffs on steel and aluminum exports. While Mexico and Canada were exempted, China was the most notable target of the proclamation. The tariffs sent shock waves throughout the stock market when China retaliated with its own tariffs, with the Dow Jones falling by more than 730 points. Across CRE, developers and construction companies have already begun to prepare for the rising construction costs that will result from the tariffs.
But for industrial, especially logistics centers, the impact will be less dramatic, Anderson said. Most of the tariff discussions have been focused on raw materials that go into the production side of the supply chain. Most of those types of goods don’t go through warehouses.
Steel, while important in the construction of the warehouse itself, doesn’t typically make its way through a warehouse, so it would have no impact on Prologis’ assets.
“The Prologis portfolio is positioned at the consumption end of the supply chain, so the tariffs would have much less effect on us compared to real estate that serves the production end of the supply chain,” Anderson said.
The threat of a trade war could also have an impact on the shipping industry and ports, which account for 80% of all global trade. With the U.S. and China both threatening to impose a 25% tariff on a range of goods moving between the two countries, maritime shipping volume could fall, along with profits. Tariffs could put up to 7% of Asia-to-U.S. shipping at risk and impact 1% of total global shipping.
Last year, for example, the U.S. shipped nearly 57,000 containers worth of soybeans to China, but tariffs could undermine the volume of exports. The long-term effects of these tariffs are still open for speculation.
“Any trade war is bad for economic growth and would affect every business, including ours,” Anderson said. “If the economy grows slower than it otherwise would, we all would be worse off. But now, I see our customers simply going about their business and I think they will continue to do so until, and if, there is something specific they can react to. Remember, tweets aren’t policy.”
2. Rising interest rates
As the U.S. economy continues to improve, the Federal Reserve has started to raise interest rates to keep up with inflation. After years of historically low rates, the 10-year Treasury yield touched 3% for the first time in four years, signaling to investors that interest rates are continuing to move higher and that now is the time to take on long-term loans or refinancing.
“Interest rates are low by historical standards both in an absolute sense and relative to inflation, and we are projecting that long-term interest rates will rise 50 basis points or more over the near to medium term in the U.S. and Europe,” Anderson said.
Anderson does not see higher rates heavily impacting real estate values in the short term. Current valuations have never factored in ultra-low interest rates, so the normalization of those rates should not have a major impact. Interest rates also typically rise in response to healthy economic growth and inflation, and both situations are positive catalysts for real estate rents, net operating income and property values.
3. The growth of e-commerce
Consumers spent $453B on online purchases in 2017, a 16% increase compared with $391B in 2016. The growth rate is the highest since 2011 when online sales grew 17.5% over 2010.
As a direct result of e-commerce success, there has been a push for improved last-mile delivery, shortening the delivery times and cost to reach consumers. Online retailers have increasingly begun occupying space in or near urban areas, paying premiums to be closer to customers.
“Site selection for infill urban core is difficult,” Anderson said. “We look for proximity to transport networks and a dense, affluent population base. Beyond that, there is no one-size-fits-all strategy. A site could take the form of a covered land play, an aggregation play, a redevelopment play or some other variation. The reality is that these projects are complex, take significant time and tons of capital.”
Land for industrial property in urban areas is scarce, forcing developers to either transform abandoned office or retail assets into warehouses or adopt a multilevel building design. Prologis has leveraged its expertise in Asia multistory facilities to deliver industrial product in the U.S. In Seattle, Prologis is developing Prologis Georgetown Crossroads, a three-story, 590K SF facility designed specifically for last-mile delivery.
“This is Prologis’ first multistory project in the U.S.,” Anderson said. “This type of product demonstrates a core competency for Prologis and is a source of competitive advantage that we can capitalize on.”
Automation has quickly evolved from dream to reality, from automated trucks to robots that sort and organize pallets in warehouses.
Many of Prologis’ customers are already using automation to sort packages and robotics to assist with the sorting of pallets, Anderson said. Others are leveraging data on traffic patterns, weather and consumer demand to more efficiently move goods through the warehouse and increase employee safety and productivity.
The design of the buildings has had to evolve accordingly. Clear heights have risen to account for higher volumes of goods and conveyor systems while mezzanine space has become more common. Smart industrial buildings, leveraging tools from security cameras to WiFi-enabled robots, also demand more electricity and more reliable internet connectivity.
Outside the warehouses, the arrival of automated trucks will speed up delivery times by relying less on human drivers for transportation over long distances. Current autonomous technologies allow for automated lane-keeping and cruise control. Future technology could allow vehicles to travel greater distances than current trucking regulation allows, and they will move at night or early mornings when streets are less crowded.
“Part of the network could be located farther away from population centers and still be effective,” Anderson said. “This technology likely won’t be deployed for at least another 10 years, and some say the timing is much longer given the myriad of regulations, safety considerations and labor union objections.”
Anderson will deliver the keynote at NAIOP’s I.CON: The Industrial Conference, which runs June 7-8, in Jersey City.
This feature was produced in collaboration between Bisnow Branded Content and NAIOP. Bisnow editorial staff was not involved in the creation of this content.