E-Commerce a ‘Tailwind’ for Industrial Space

The U.S. industrial sector is flourishing while retail flounders due to greater demand for warehouse space and more diverse shipping needs due to e-commerce growth, reported Ten-X, Irvine, Calif.

“E-commerce is serving as a major tailwind for industrial space, as is an increase in total trade flows plus an increase in demand for server space,” Ten-X said. “Western markets, in particular, are benefiting from favorable outlooks going forward.”

Ten-X noted industrial property pricing reached a new peak, $80 per square foot, in the second quarter and industrial cap rates fell 30 basis points year-over-year to 5.6 percent.

“The technological and cyclical challenges that are negatively affecting the office and retail sectors are benefitting the industrial sector,” Ten-X said, noting increased use of cloud computing has reduced the demand for office space as it has driven demand for computer server farms.

“We expect both supply and demand to soften through 2018 as we enter the latter stages of the current economic cycle,” Ten-X said, predicting industrial vacancies will bottom out in the 7 percent range. Absorption could turn negative in 2019 or 2020 as new supply enters the market, then will likely bounce back in 2021 as economic growth returns, the report predicted.

Meanwhile, industrial properties keep getting larger due to e-commerce, reported CBRE, Los Angeles. “E-commerce has driven a more than doubling of the average footprint of warehouses built in the U.S. since the early 2000s, with the largest expansions coming in metro areas with the big populations that online sellers covet and the ample land that developers need,” CBRE said in its industrial sector MarketFlash report.

CBRE compared warehouses built in the U.S. during the last development upswing from 2002 to 2007 to the current building period of 2012 through 2017. It found the average size increased by 143 percent in that span to more than 184,000 square feet and the average warehouse clear height rose by 3.7 feet to 32.3 feet.

“This dramatic expansion of warehouse size and height in the U.S. is almost purely a product of e-commerce, which has created demand for massive warehouses with high ceilings to store extensive, fast-moving inventories,” said CBRE Global Head of Industrial & Logistics Research David Egan. “This demand is a long-term factor, meaning that U.S. markets without enough modern logistics facilities will see continued construction as they catch up.”

Egan noted the largest gains in average warehouse size came in markets with big, growing populations and a ready supply of developable land, led by Atlanta (284 percent gain in average size), Cincinnati (237 percent) and California’s Inland Empire (222 percent).