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Real estate

Industrial staying power

Industrial staying power

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%.1

We believe the industrial sector's strength will continue, based on five primary factors converging to drive growth.

1. E-commerce growth explodes

Consumers ordering goods and services online during COVID-19 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 rise another 5% to 10% by 2025, which could lead to an even higher demand for warehouse space from a larger variety of tenants. 

Online sales escalate during coronavirus lockdowns

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 and medical supplies – realized high costs due to low inventories and supply chain failures. 'Just-in-case' management, which requires holding larger inventories using more warehouse space, allows retailers to distribute goods to consumers as soon as possible, even when supply chains are disrupted. 

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, Pakistan, Guatemala, Mexico and Colombia, given their attractive labor costs and large labor pools. We expect a surge in east coast market demand relative to west coast ports, due to lower trade volumes from East Asia, in favor of high trade volumes from South Asia and Latin America.

Major U.S port import proportion by country

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 increasing e-commerce sales and homebuilding disproportionately in these cities. 

Annualized forward growth in USPS deliveries

5. Single-family home demand increases

Single-family home demand has traditionally been the primary driver of light warehouse demand as construction companies use the space to store building materials and equipment. Single-family permit growth strengthened in 2020, growing from -0.6% year over year in Q4 2019 to 14.4% year over year in Q4 2020. Most importantly, we expect demand from home construction companies to support warehouse rent growth even if we see a slight decline in e-commerce demand. 

Single family home permit growth withstood the pandemic

Sector insight

The industrial real estate asset class is comprised of five property sub-types: manufacturing, warehouse (light industrial and bulk logistics), flex space (higher office ratios and smaller building footprint relative to warehouse), research & development space (used mostly for science, technology and engineering-related developments) and other (special purpose use). This article focuses solely on the warehouse component of the broader industrial sector.


Commercial property price index

To learn more about the opportunity in the industrial sector, watch our video below:

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1Based on capital returns of warehouse and core sector properties in the NCREIF ODCE Closed End Fund from YE 2019 to YE 2020
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