JLL: A ‘Pause’ in Industrial Sector Could Be a Good Thing

After several quarters of record-breaking high rents and low vacancies, the industrial real estate sector will likely “pause” soon, said JLL, Chicago. But it said that could be good news for smart owners, investors and occupiers.

The U.S. economy has cooled somewhat in recent months as interest rates have increased. This slowing economic growth has an upside for the industrial property sector, said JLL Americas Industrial President Craig Meyer.

Meyer noted the business cycle is in its late phase but called a pause “an opportunity to close the gap between demand and supply of industrial property–and that gap is significant,” he said.

The industrial vacancy recently fell to a record-low 4.8 percent, though new space is coming online quickly.

Meyer said companies will need a “street-level” understanding of market-specific dynamics to be successful should the industrial market slow significantly. “While anyone can succeed in a rising tide, only smart operators thrive in a slowing environment with an uncertain outlook,” he said. “In this environment, it’s the operators who combine knowledge, experience, discipline and data-driven insights that will prevail. Being street-savvy is the right strategy for today.”

JLL predicted e-commerce and logistics companies will continue to drive industrial real estate leasing as last-mile delivery become increasingly critical. “Savvy [industrial real estate] occupiers will understand how the bricks and clicks fit together and will use data and analytics to determine whether and where they need physical storefronts versus fulfillment and distribution centers,” the report said. “They’ll bring logistics managers into the real estate conversation for a holistic view of their supply chains.”

Smart industrial property developers will watch demand trends closely to envision new kinds of facilities to support last-mile deliveries in urban areas, JLL said. They will also pursue intermodal inland port opportunities, as cities including Salt Lake City, Phoenix and Denver seek to connect by rail to avoid trucking capacity shortages.

JLL Managing Director and Economist Walter Kemmsies said the industry can expect continued growth in intermodal logistics as a critical part of the overall U.S. supply chain to counter traffic congestion, increasing transportation costs and a shortage of truck drivers. “And, with the ‘reshoring’ of manufacturing [bringing it back to the U.S. from overseas], enterprising developers will pursue new opportunities for intermodal services and logistics real estate, especially in the automotive and industrial goods sectors,” he said.

A slowing industrial market would favor the property investors with the deepest understanding of the sector, Meyer noted. “Sharp investors will return to their roots and challenge prevailing assumptions about the market,” he said.