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As the backbone of the global supply chain, industrial real estate demand continues to grow.
As the backbone of the global supply chain, industrial real estate demand continues to grow. Industrial warehouses link product manufacturers with consumers by providing essential storage and repackaging space for products of all types. From large bulk warehouses that are used as logistics and distribution centers to store and distribute goods across a wide geographic area, to local facilities that serve customers down to the last mile, products tend to spend time in multiple distribution warehouses before making their way to the final consumer.
The typical consumer product is stored in four or more distribution warehouses from point of manufacture to point of retail consumption1.
The growing number of e-commerce options, increasing consumer access to online purchases, and the swelling demand for rapid delivery impacts the location, size and number of industrial warehouses needed within a geographic area. E-commerce retailers require up to three times as much warehouse space on average as traditional brick-and-mortar retailers,2 and while e-commerce is still early in its adoption phase with only about 12.4% of retail sales coming from online as of June 30, 2018, consumers continue to push e-commerce sales forward.
Thanks to increasing demand for e-commerce, industrial rents and occupancies are surging across a range of building shapes and sizes, from bulk distribution warehouses in centrally located markets like Atlanta, Chicago and Dallas, to locally-oriented warehouses in high growth markets like Las Vegas, Charlotte, Houston and Nashville. Many of the areas seeing the best rent growth are supply-constrained coastal markets like New Jersey, Seattle and Southern California. And markets like the Inland Empire and Central Pennsylvania are seeing a surge in industrial demand as the result of the realignment of containerized imports with population centers on the west and east coasts.
In terms of future appreciation, industrial real estate is set to perform well, as several years of market rent gains and occupancy gains are translating to income growth. Since 2013, industrial market rents grew by 5.5% annually on average, which has been the highest rent growth of any of the four main property sectors (the other three sectors include office, retail and multifamily); and occupancies were at near capacity at 95% as of December 31, 2017, which is higher than at any time during the last economic cycle of 2001–2008.6
6.3% Rental growth rate – Year-over-year rental growth rate for industrial real estate in the United States of 6.3% as of June 30, 20187.
Total returns have also been strong and may continue to provide investors with solid performance. Core industrial real estate (high-quality warehouses that are fully leased to creditworthy tenants) has delivered the highest returns of the main property sectors, throughout the current economic cycle (2009–2018) — producing 13.06%, 13.42%, 13.20% and 7.70% total returns on a one-, three-, five- and ten-year basis, respectively.7 Going forward, industrial real estate’s fundamentals remain strong and core industrial real estate is expected to continue to perform well.8
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