Market Commentary - April 26, 2024

Vantage Point: Industrial Insights

April 26, 2024

Daniel Brereton
By Daniel Brereton

Of the core-four CRE property types, industrial properties are of particular importance to the recovering (and evolving) US economy. Updates to supply chains and a push for even more efficiency has driven demand for these properties in new and established markets alike. As the US consumer evolves and new technologies drive demand for more storage space, industrial properties will see higher demand and require new development in rising markets.

The outlook for industrial CRE remains robust, largely driven by the growth of e-commerce, changes in supply chain management, and increased industrial activity in various sectors. This sector is often seen as more resilient compared to retail or office spaces, especially in times of economic uncertainty.  EM Investment Partners (EMIP) has updated the recent market picks for industrial properties, and we discuss some drivers and potential risks below.

Key Drivers

E-commerce

Continued growth in online shopping is a significant driver for demand in warehouse and distribution centers. This includes the need for last-mile delivery facilities, which are crucial for reducing delivery times to consumers. Changing consumer preferences continue to push for faster deliveries and fresher food. This means that companies must adapt to these preferences and establish more robust supply chains.

Moreover, smaller, online retailers will demand a share of industrial space without committing to a large warehouse space. Co-warehousing and small-bay industrial properties can benefit from this increased demand. And given the smaller size, there is often a rent premium combined with the diversification benefits of multiple tenants.

Supply Chain Adjustments

Large distribution centers power behemoths like Amazon and Walmart. But more intricate logistics and a push for efficiency has made the supply chain more granular. It’s now common to have dozens of small-scale warehouses in key locations that allow for faster, more tailored deliveries. The trend towards diversifying supply chains and increasing resilience has led to higher demand for industrial spaces. Companies are seeking to mitigate future disruptions by investing in more strategically located distribution hubs.

Demographic Shifts

The COVID-19 pandemic still has lasting impacts to population centers. Large shifts in the population have led to a need for adapting the supply chains which has driven the need for new industrial developments. Even so, as urban populations have grown, there is a rising demand for industrial properties within or near cities to facilitate quick distribution of goods.

Nascent Technologies

Beyond the typical industrial properties like supply warehouses, distribution centers, and small bay businesses, recent developments in artificial intelligence and information technology have created a need for new types of industrial properties. Although data centers could be considered a property type of their own, conversions of existing buildings and demand for construction projects increases competition in similar markets. Thus, values have the potential to increase commensurately. 

Attractive Markets

Orlando, FL

The Orlando, FL, market ranks 8th of 50 in the EMIP Markets Framework. The unique geography of central Florida with many lakes blocking new construction makes this a supply constrained market. Further, its proximity to Miami and status as a hub to the broader US makes the market valuable to large industrial tenants. Additionally, local, small businesses drive significant demand for small-bay facilities especially given their need for storage and a storefront in one location. Investors might consider the Portal Co-Warehousing offering for an allocation to central Florida industrial real estate.

Northern New Jersey

The tri-state area of New York, New Jersey, and Connecticut forms a powerhouse of economic activity. I-95 flows from New York City in both directions passing through northern New Jersey, which ranks 7th of 50 in the EMIP Markets Framework. This area is tightly packed with industrial properties of all types. The maturity of the market makes it difficult to bring new development. Thus, work must be done to renovate and lease-up existing properties. And, with an attractive entry price, these properties can be attractive with an experienced sponsor. The tri-state area has been and continues to be a crucial market for the east coast. Snowball Developments recently acquired the Northern NJ In-fill Industrial property which investors might consider for a value-add investment.

Potential Risks

Economic Disruptions

As we experienced during the COVID-19 pandemic, slowdowns (or shutdowns) can have a profound (yet expected) impact on the economy. Future economic disruptions can impact the viability of markets and the properties in them. However, what we also saw is that there is a shift to making supply chains more robust. These changes are designed to help dampen the impact of slowdowns and make recoveries faster.

Technological Changes

While technology is a driver, it’s also a risk. Companies that fail to keep up with modernization may find their facilities obsolete. Additionally, cybersecurity becomes a concern as more technologies are integrated into industrial operations. Oversupply in hot areas like data centers could also be a risk. A key mitigant to this is the stable need for core industrial properties like those discussed above. Adaptable properties like the Portal Co-Warehousing offering are designed to flex as tenant needs change.

Looking Forward

When compared to more volatile sectors like office and retail, industrial properties consistently show resilience in varied economic conditions. Secular drivers and key changes in demand for industrial properties provide an opportunity to capitalize on the post-pandemic recovery that continues to adapt to new preferences. You can read more about industrial properties on our blog here. And to learn more about our current industrial offerings, check out our open offerings.

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Daniel Brereton
Daniel Brereton
Daniel leads our Investor Relations team. He and his team are responsible for educating investors about EquityMultiple and private real estate investments. Prior to joining EquityMultiple Daniel spent several years at UBS in high-net worth and corporate wealth management consulting for retirement plans in excess of $3 billion. He has experience with all types of alternative investments with a keen interest in real estate. Daniel is also a U.S. Army veteran, serving for four years as an active duty engineer officer at Schofield Barracks, HI. Daniel received his Bachelor of Arts in Mathematics from New York University and Master of Science in Financial Engineering from the University of Southern California.

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