Three Recent Trends in Industrial Real Estate
Manufacturers and other producers are beginning 2015 with a positive outlook. As a result, they could look to expand their number of properties and space for facilities to prepare for a great performing year. CBRE, a large commercial real estate services firm, projects that new construction for industrial spaces may grow to 141.8 million square feet in 2015 -- up from 115.2 million square feet the previous year. 2015 could thus see greater sales and industrial real estate investing.
Here are three major trends in the industrial real estate sector:
1. Growing GDP, Manufacturing Sector
Scott Marshall, executive managing director for industrial services for the Americas at CBRE, cited improving gross domestic product and gains in the manufacturing industry as the causes of the great outlook for the industrial sector. The Wall Street Journal recently reported that a survey of economists projects that GDP - an overall measure of economic activity - will rise 3 percent in 2015, a healthy increase.
“There is still plenty of upside for the industrial market, particularly for rental growth,” said Marshall. “Both cyclical demand drivers - GDP growth, expanding manufacturing sector - and structural demand drivers - e-commerce, supply chain evolution--will promote strong user demand across geographies and product types.”
Manufacturers do seem optimistic. In a fourth quarter of 2014 report, the U.S. Bureau of Labor Statistics said that productivity in the manufacturing sector rose 1.3 percent in this period even as productivity dropped in other major segments of the economy. As a result, CBRE believes that such growth in the manufacturing sector could translate to increased industrial real estate demand.
“U.S. manufacturing is on the rise, with production outputs now at all-time highs,” CBRE wrote. “However, these gains are due largely to increases in technology and automation and are not a result of elevated employment or reshoring. The increase in outputs has a stimulative effect on industrial demand in key manufacturing and supply chain markets.” (“Reshoring” is a term used to describe the return of manufacturing jobs that had earlier moved to overseas facilities.)
2. Explosion of E-Commerce Activity
In addition to Marshall’s remarks, the rise of e-commerce could result in more demand for warehouses, production facilities and other buildings for the production, distribution and shipping of products available online. A report by Prologis said about 30 percent of demand for industrial big-box real estate is connected to the explosion of e-commerce activity, ReJournals reported. Analysts projected e-commerce transactions may surge to $300 billion in 2015 if an estimated 185 million consumers are shopping online in the U.S. With e-commerce growing as a retail sector, companies in that sector may well need to their physical fulfillment facilities in order to keep up with demand for product shipments.
Merchants that operate primarily online may also switch strategies to include omnichannel activity, Multichannel Merchant reported. Amazon, for example, recently said that it was in talks to purchase brick and mortar stores from Radio Shack in order for it to reach out to more customers. Other retailers are also increasingly focusing on omnichannel opportunities to increase both online and in-store sales.
3. Improving State of Oil and Gas Industry
Although the oil and gas industry has seen lower revenue from drops in oil prices, the industry is still investing in refining and similar facilities. The Houston Business Journal reported that CBRE had indicated that at the end of 2014 the vacancy rate in Houston had dropped to its lowest level since the second quarter of 2003. If those vacancy rates remain low, construction could increase to meet growing demand for industrial space in states with significant oil refining or petroleum product manufacturing sectors.
The Houston Business Journal also reported that, despite reports of energy firms terminating employees because of the fall in oil prices, several companies recently undertook multi-billion ethylene projects, including the $6 billion plant in Baytown, Texas, built by Chevron. As a result of these new facilities, those companies will likely increase hiring to maintain productivity, which will may lead to more demand of industrial real estate in the Houston area. The report also cited Leta Wauson, CBRE industrial research analyst, as saying that the employment gains brought on by new energy projects could offset budget cuts upstream, and that this might have an impact on wholesale and distribution real estate because petrochemical companies need these properties to support their operations.
Additionally, the decrease in oil prices and energy costs could encourage manufacturers and other companies that heavily depend on oil and natural gas for production to further increase their output -- which brings us back to the first trend noted here, the improved state of the manufacturing industry generally.
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