Trends igniting growth in the industrial sector
Warehouse facilities in the industrial sector serve multiple purposes in our modern, digital economy, spurring growing demand over the last decade. Since the onset of the global pandemic in March 2020, warehouse values have risen 6.8%, while overall property values have fallen by 2.9%.
Nuveen Real Estate believes the strength in the industrial sector will continue, based on five drivers converging to sustain growth.
1. E-commerce growth explodes
Consumers ordering goods and services online during coronavirus lockdowns boosted e-commerce sales growth significantly, rising from 16.6% to 36.7% year-over-year from the fourth quarter of 2019 to the same period in 2020. The penetration rate increased from 11.2% in Q3 2019 to 14.3% in Q3 2020. We expect that rate to increase another 5% to 10% by 2025, which could lead to even higher demand for warehouse space from a larger variety of tenants.
2. Supply management shifts to ‘just-in-case’
At the outset of the pandemic, retailers using ‘just-in-time’ management – such as suppliers of groceries, aluminum cans and medical supplies – encountered unforeseen increases in supply chain costs. Their inability to meet spikes in customer demand ultimately led to supply chain failures. ‘Just-in-case’ supply chain management, which requires larger inventories and more warehouse space, allows retailers to hold additional ‘buffer stock’ inventories to address unexpected changes in demand. This practice is expected to elevate demand for industrial real estate, while minimizing future supply chain disruptions for retailers by increasing on-hand inventories.
3. Re-routing supply chains creates new demand
Major corporations have been diversifying their supply chains to manage risk and respond to changing global economics. Supply chains are shifting away from China, toward India, Malaysia, Pakistan and Vietnam, given their attractive labor costs and large labor pools. This transition will likely lead to a surge in East Coast market demand relative to West Coast ports. Moreover, companies are also beginning to migrate mission-critical supply chain activities to geographic regions closer to the end consumer. This will lead certain corporations to relocate activities back to the U.S., Mexico and Canada. The ‘on-shoring’ or ‘re-shoring’ of supply chain activities is expected to benefit the industrial sector.
4. Population relocation favors the Sun Belt
Warehouses in markets such as Raleigh, Austin and Nashville are expected to experience the greatest relative surge. High population growth, especially among higher-income earners, is fueling e-commerce sales disproportionately in those cities. In addition, other activities that lead to increased demand for industrial real estate, like home building, are expected to flourish in these markets. Corporations are also more likely to focus on the re-shoring of supply chain operations to Sun Belt markets, due to higher trade volumes from and enhanced proximity to operations in Mexico and Central America.
5. Single-family home demand increases
Single-family home demand has traditionally been a primary driver of light industrial and warehouse demand, as construction companies and vendors use the space to store building materials and equipment. Single-family home permit growth strengthened in 2020, growing from -0.6% year-over-year in at the end 2019 to 14.4% year-over-year at the close of 2020. Most importantly, Nuveen expects demand from home construction activity and related companies to further support warehouse rent growth as an unrelated but complementary demand-driver to e-commerce.
Industrial real estate is comprised of a variety of property subtypes:
- Light industrial
- Bulk logistics
- Cold storage
- Research and development space
Primarily driven by medical, technology and engineering uses.
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