U.S. industrial real estate development hit an all-time high in 2017, with more than 208 million sq. ft. completed, and another 277 million sq. ft. currently under construction. eCommerce continues to be a major factor driving industrial development to record highs as sales have increased by 16 percent year-over-year and now account for 9 percent of all U.S. retail sales. Continued growth in the sector has resulted in nearly 70 percent of all new industrial development to be built on spec. This is proof of both investor and developer confidence in the sector’s strength.
To underscore the development demand, industrial REITs have continued to outperform other real estate asset classes. With a booming economy and growing demand for next- or same-day deliveries, we believe this trend will likely continue regardless of a potential shift in the dollar value. Factors supporting the sector’s success include continued demand for last-mile delivery facilities in dense population centers, reshoring of American businesses and manufacturing jobs, increased use of grocery and meal delivery services, and strong performances from brick-and-mortar businesses that are melding in-person and online sales.
So where does this leave rents and construction costs? In strong commercial markets like Los Angeles, there is a large spread between pro forma rents and development costs that is providing a “cushion” for the market. Though development costs are high, rents are even higher, which gives us confidence that the market should remain strong in the near future. The success of the LA market is largely attributed to the amount of goods coming through the Los Angeles International Airport and the Los Angeles and Long Beach Port Complex. Access to ports and intermodal facilities is key to our development strategy.
On the retailer side, the need to meet consumer demand is forcing many companies to re-examine their supply chains to understand what they’re up against from a site selection standpoint. For many, the “ideal location” often comes at a higher cost; selecting a market and a property are now business-critical decisions that favor high-quality space in prime locations near urban centers. Many retailers are realizing that neither one size nor supply chain strategy fits all. Many companies can be successful by developing a supply chain strategy and select a site within a 2-day drive of a target consumer base, but others like Amazon or those that are looking to compete with Amazon may need to locate distribution centers deeper inside of major population centers. These strategies are complex and ever changing, but at Xebec, we are singularly focused on industrial real estate integral to the modern global logistics supply chain. This focus allows for structure, it fosters automation, it demands discipline and it enhances knowledge of products and markets.
Don’t hesitate to contact us with questions or thoughts. We love to “geek out” on this stuff.