Posted on December 28, 2021 · Posted in Industrial / Flex, Investments, Retail

That old saw about “no room at the inn” can be changed to “no room at the warehouse” in today’s market for commercial real estate.

While the travel-dependent hospitality business is generally pulling up the rear in pandemic recovery, the industrial sector is on a serious roll and is poised to emerge from this viral mess unscathed.

According to a recent report from JLL, the industrial market hit a new record-low vacancy rate of 4.3% in the third quarter of 2021 as net absorption — space newly occupied minus space newly vacant — hit a record high of 135.1 million. Consequently, rents rose too, 7.1% year over year.

While those rent hikes pale in comparison to, say, some of our hottest housing markets, there’s plenty of reasons to believe industrial CRE will thrive going forward. Here are four.

1. Demand From E-commerce And Global Logistics Supply Chain

E-commerce was creating intense demand for global and last-mile logistics alike before the pandemic, and that has only grown as shoppers order online in unprecedented fashion. There seems little reason to believe that demand will abate significantly or soon, and industrial space is a critical part of that global supply chain. 

2. Surge Of Last-Minute And Last-Mile Warehousing

Manufacturers and distributors have long been using a “just in time” approach to inventory of product and parts. Supply chain disruptions have many now switching to “just in case,” increasing the demand for space to keep critical materials available and nearby. Speaking of nearby, the need for last-mile space is also driving the demand for smaller facilities at critical nodes on the supply chain close to a product’s final destination, whether it be a store or factory.

3. Heavy Investment In Buying And Building

Big money is being spent on buying and building to meet this growing, intense demand for industrial space, and that’s forward-looking investing. CRE advisor and manager Transwestern said industrial building activity is twice what it was five years ago, with 636.6 million square feet under construction in 3Q21.

Meanwhile, that aforementioned JLL report said that of the 85 million square feet of new industrial space delivered in the third quarter, 69.6% was preleased. That kind of demand is attracting buyer attention, too. Just one example is Industrial Logistics Properties Trust winning the battle for Monmouth Real Estate Investment with a $4 billion cash bid that bested Sam Zell’s Equity Commonwealth and Barry Sternlicht’s Starwood Capital.

4. A Hedge Against Inflation

Real estate in general is considered a hedge against inflation, especially commercial real estate, because so many leases include built-in rent increases. The Federal Reserve already has announced anticipated interest rate hikes to counter inflationary pressures, and the intense demand for warehouse and logistics space will enhance the ability of owners of this kind of real estate to pass expenses on while minimizing the hit on their bottom line.

 

Source: Motley Fool

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