Industrial Players Prepare For More Retail Disruption, Possible Downturn

Once considered a pretty unsexy part of commercial real estate, the industrial sector has seen enormous growth in the past half-decade. Now investors, brokers,  developers and landlords are working out how to make the most of its growth — and ways to weather any storms that could be coming its way.

Across the country, net asking rents are at their highest rate in 30 years, at $7.37 per SF, according to CBRE fourth-quarter figures. The strong economy, along with the Amazon-driven e-commerce revolution, has pushed occupancy rates, demand and asset prices to unprecedented highs.

“I’ve never seen it this good in my life,” CenterPoint Senior Vice President PJ Charlton said at Bisnow’s National Industrial and Logistics Summit in New York last week.

“Now in the next year or two, you will see more product built than ever … it’s going to be fun to see how absorption keeps up with supply over the next year or two.”

The companies, investors and developers who have capitalized on the sector’s fast growth are now considering the best places to buy, the right buildings to create and the kind of tenants they will need to cater to in the coming years.

Plus, rumblings about a looming recession — but no concrete evidence of when it might happen, or how painful it may or may not be — means shrewd business decisions are crucial.

“Everyone wants to talk about what inning we're in. It’s a long game. We are actually at the blackjack table, and it's 2 a.m., and I'm way up. The dealer is a good dealer ... everyone at the table is playing smartly,” Andrew Mele, the managing director of Trammell Crow’s Northeast Metro division, told the audience.

“Now, it's 2 a.m. Do I go to bed? Do I go to the buffet? Do I keep playing? But now I got a couple of drunk, bachelor party bros at the table. A Midwest couple is hitting on 17. So ... it's like, you can continue to play, but everything around you is now different.”

There are definitely concerns about the overall picture, Mele told the audience, though the next year to two years “feels OK.”

He said that had Jeff Bezos not started to sell books in the 1990s, the industry would not be what it is today, but pointed out that there could be some disruption to the e-commerce market in the event of a “garden-variety recession.”

“The predictions for [e-commerce] growth continue to be very frothy,” he said. “The thing about e-commerce is, how many people actually make money delivering something to your door?” he asked, before answering his own question.

"Not a lot."

In some submarkets, e-commerce absorbs 50% of industrial space. If that were to shrink, it would have an impact on the overall market, Mele said.

Right now, there is no doubting the predictions for online shopping are rosy. 

E-commerce accounted for 9% of all sales in the United States in 2017, and is expected to hit 12.4% by next year, according to Statista. Retailers are rapidly changing their approach, looking to cater to a new generation of shoppers who were not raised on brick-and-mortar buying.

Just last week, Tommy Hilfiger announced it would shutter its Fifth Avenue flagship location and “test new modular, digitally infused retail concepts” as part of its evolution. The question is how that translates into industrial demand.

“I think it’s going to be really telling and interesting over the next one to three years … How much retail demand is there, how much e-commerce demand is there,” Seagis Property Group partner Omer Mir Ahmed said.

“Retailers are under a lot of pressure with leverage, their whole model is shifting to offer a personal experience. Does that mean more warehouse space? It will be interesting to watch and see how that impacts the whole market.”

But Duke Realty Northeast Senior Vice President Jeff Palmquist said along with the Amazon behemoth, companies like Walmart, Best Buy and eBay are major players and need space.

And it is not unique to merchandise: furniture, food and meal kits will all need space to supply buyers with their online purchases at top speed.

“It’s amazing to watch,” Palmquist said. “If you can’t make money in this environment, you need to look at a different occupation.”

First Industrial Realty Trust Senior Investment/Development Officer John Hanlon pointed out that while there are some issues with oversupply in some parts of the industrial market, like south Dallas and some pockets of Atlanta, the overall fundamentals are strong.

Still, panelists said locations and the kinds of buildings that are being created have become crucial decisions.

“There's more of push into urban core,” Prologis East Region President Nick Kittredge said. “We are all seeing that trend.”

Prologis, and some other firms, are starting to look at multistory warehouses as the best way to offer tenants speedy access to heavily populated cities, although some people think that type of development hasn’t been proven as worthwhile.

Regardless of the number of stories, overall design is increasingly important. More companies are willing to invest in the amenities at these buildings as a way of tackling labor shortage problems.

“They see themselves there longer, they see it as their own space. It helps with labor retention,” Rockefeller Group Executive Vice President of Industrial Brandi Hanback said. “I won’t say everyone is jumping on the wellness bandwagon … most people who work in these facilities get plenty of exercise. The same trends in office aren’t transferable.”

But companies are now looking for good outdoor space, lighting and comfortable training space, and even lounges for truck drivers, she said.

“Sustainability is top of mind,” said Ivanhoé Cambridge Executive Vice President of Industrial in North America Mario Morroni, pointing to Nike’s distribution center in Belgium where sheep mow the lawn and wind turbines produce electricity.

“You have to think what the tenant needs are. We are making sure anything we are developing is going to be as flexible as possible,” he said. “You have to [think about] the footprint on the community. So a lot of the landscaping uses indigenous plants, making sure you are not using too much water… You can walk past these new distribution centers and you don’t even look like you are in an industrial park.”