Industrial and Supply Chain Real Estate Expected to Soar in 2018

Compared to “trophy” office skyscrapers, warehouses and distribution centers were once the ugly ducklings of commercial real estate. Fast forward a decade and they are emerging as beautiful swans for both real estate investors and corporate occupiers. Low vacancy rates and high demand for warehouse space are forming perfect conditions for the sector in 2018, according to JLL experts.

“E-commerce activity is really driving the industrial sector's success,” said Craig Meyer, President of JLL's Industrial group, Americas. “It represents around 9 percent of total U.S. sales, and experts predict this could reach nearly 14 percent in the coming years. These figures, along with a strong global economy, indicate that demand for industrial space will only increase in 2018.”

This coincides with a recent study conducted by San Francisco-based Prologis with Oxford Economics. That research, too, maintains that logistics real estate delivers goods into the hands of time-conscious consumers faster than ever.

Top five growth drivers in 2018

“The only accurate prediction going into 2017 was that things were going to change,” said Walter Kemmsies, Managing Director, Economist and Chief Strategist of JLL's Port, Airport and Global Infrastructure (PAGI) group. “Despite that uncertainty and a series of frequent and intense natural disasters, we close out the year with a positive U.S. and global economic outlook.”

With this in mind, JLL has identified five reasons the industrial real estate market is set to soar in 2018:

1. The three Ts of Trump – Trade, Tax and Transportation infrastructure. While there is no evidence of an overt strategy coming from the White House, the dominos seem to be falling in a way that suggest 2018 could be the year for major infrastructure legislation. Trade agreements are being renegotiated and the tax bill is nearing completion, so the doors could open for infrastructure. The urbanization of U.S. cities cannot continue with functionally obsolete roads, bridges and other infrastructure. As upgrades are planned, raw materials will be needed and warehouses to store them.
2. E-commerce continues to set records. Online shopping and consumer demand for rapid delivery is changing what, where and how many distribution centers are needed to feed the consumer e-commerce beast. E-commerce continues to be the fastest-growing sector. In the third quarter alone, nearly 25 percent of total U.S. leasing demand came from e-commerce companies expanding their existing market footprints.
3. Urban logistics move closer to the customer. In a bid to narrow the gap with brick and mortar stores, e-commerce and its related logistics companies are looking to accelerate their investment in “last-mile” warehouse spaces. Global and domestic tenants are expanding their presence beyond a single mega-warehouse facility to multiple U.S. nodes, using logistics space to extend their reach to connect with customers. At the same time, distribution models are changing and location strategy is more focused on proximity to labor and customers. As e-commerce operations mature, tenants will seek smaller distribution centers closer to urban cores, but finding the right location will become challenging.
4. Continued investment in the darling of U.S. real estate. Investor interest is higher than ever, as institutional capital still views industrial property as a lucrative investment opportunity. Investment sales are up 34.7 percent this year and there is a resurgence in industrial real estate portfolios, according to JLL’s Q3 2017 Investment Quick Look.
5. The Fourth Industrial Revolution is well underway. The robots aren't coming—they are already here. Human-free warehouses are a long way off, but sophisticated automation is becoming a feature of today's industrial buildings. It's already possible to offload goods from a truck, put them on a pallet and onto a different truck with barely a helping hand from a human being. At the same time, drones equipped with sensors can now scan bar codes for inventory purposes, safely restock and pick merchandise on high shelves, and move small items quickly around the warehouse. Automation within the warehouse is an important emerging trend that will continue to develop. This will reshape how warehouses are designed and how they are used.
“These five factors and smart infrastructure investment could nurture economic growth, which is especially needed in cities and states that have lost economic momentum with the decline of manufacturing,” said Kemmsies. “Investing in export-related infrastructure is also critical to balance trade deficits and would especially benefit agriculture, capital goods and energy, which are the most competitive sectors of the U.S. economy. This could further boost the industrial real estate sector.”

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