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As e-commerce booms, warehouses and industrial real estate extend hot streak

In the Amazon era, logistics space, especially near urban cores, are hot commodities

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One of the most consistent performers in the real estate world, industrial and warehouse space continues to grow at a steady pace, according to a new report, and seems poised to benefit from increased prices, low supply, and the boom in e-commerce.

According to a new industrial market analysis from Cushman & Wakefield, demand for the sector in the second quarter of 2018 “continued to be impressive and broad-based.” Every segment is in growth mode, every region performed well (especially the Inland Empire, Chicago, and Dallas/Fort Worth), rent increased 7.2 percent nationally, and net absorption of new space is on pace to rank among one of the top five years on record.

The national vacancy rate, 5 percent, is below the five-year average of 6.8 percent, suggesting that recent performance is solid despite years of extended demand for warehouse space. According to Jason Tolliver, a Cushman vice president and Head of Industrial Research for the Americas, after eight years of strong demand, finding modern functional space for manufacturing or logistics is still really difficult.

“The more there’s demand, the more supply increases, that’s economics 101,” says Tolliver. “But what we’ve seen with this cycle is it’s taking a long time for supply to catch demand. We think by the end of next year, supply may finally catch up.”

Industrial real estate sector still in high demand

Metric Q2 2017 Q2 2018
Metric Q2 2017 Q2 2018
Overall vacancy 5.3% 5.0%
Net absorption 61.2 million sq. ft. 64.1 million sq. ft.
Under construction 232.9 million sq. ft. 267.2 million sq. ft.
Rent growth 3.6% 7.2%
National growth in the industrial real estate market, year over year Cushman & Wakefield

The robust growth of companies like Amazon and the hunger for warehouse space is creating a new dynamic, according to Tolliver, and there’s nothing but growth ahead. Between 25 and 30 percent of warehouse space in the country is currently devoted to e-commerce, he says.

“Online fulfillment isn’t about delivering direct to store anymore, it’s about delivering, sometimes multiple times a day, to a household,” he says. “If you asked someone in 1999 if they could order anything they want on their phone, get it delivered in an hour, and then return it for free if they don’t like it, they would say you’re crazy. But that’s what Amazon is forcing the industry to become. I think it’s going to be very recession resistant, since even if the economy softens, consumers will still want to order the basics.”

However, despite today’s warehouse boom and race for industrial space—industries as diverse as cannabis and indoor climbing compete for valuable space in or near urban centers, driving up prices—Tolliver sees headwinds in the market that will continue to restrict supply.

A combination of land and construction costs and uncertainty over tariffs have made developers more wary.

“Economic growth is driving demand for industrial projects,” he says “But if you look at the economy and economic indicators, it’s a mix of growth and anxiety. Nobody wants to be the last person to put up a new building before a downturn.”