Trepp: e-Commerce Now Drives Industrial Real Estate

E-commerce is overtaking manufacturing as the driving force behind new demand for industrial real estate, reported Trepp, New York. 

“The proliferation of e-commerce is creating new demand for industrial real estate, both domestically and internationally, and is keeping markets healthy, even as manufacturing activity slows,” said Trepp Senior Director of Research Susan Persin. 

The Commerce Department said e-commerce saw double-digit growth last year for the sixth consecutive year. E-commerce sales grew 14.6 percent during 2015 to reach $341.7 billion. 

These increased sales and the demand for faster delivery generate strong demand for both regional fulfillment centers and smaller, more urban facilities for local deliveries, Persin said. 

In addition, e-commerce merchandise returns also contribute to new warehouse space demand. E-commerce purchase returns can approach 30 percent compared to eight percent for in-store sales and traditional warehouses are not designed to efficiently handle merchandise returns, said CBRE Americas Head of Industrial Real Estate David Egan.

Persin said manufacturing will become less of a bellwether for industrial markets as e-commerce grows. “In fact, industrial market supply and demand fundamentals are strong in spite of slower manufacturing growth,” she said, noting that the nation’s manufacturing sector contracted for the last five months. She attributed the contraction to a number of factors including a volatile global economy, a strong U.S. dollar slowing exports, traditional seasonal winter slowdowns and low oil prices. 

But despite manufacturing-sector slowdown, industrial vacancy reached a 15-year low 7.2 percent in fourth-quarter 2015, Cushman & Wakefield reported. Asking rents rose 4.2 percent during the year and new industrial real estate construction grew 18 percent to exceed 170 million square feet in 2015. 

“E-commerce-generated warehouse demand is not limited to domestic markets,” Persin said, noting that research firm Technavio predicts global e-commerce logistics will grow 9.7 percent annually through 2020. “A rising middle class and greater Internet access, particularly in developing countries, have led people to increase consumption of foreign goods, especially in markets like China, with a growing middle-class.”

Healthy sector fundamentals support industrial real estate investment trusts, Persin said. Industrial REITs posted a -0.28 percent total return so far in 2016, outperforming the hard-hit FTSE NAREIT All Equity REIT average and well ahead of returns for the NASDAQ, Dow Jones Industrial Average and S&P 500.