Industrial real estate markets globally have been on a growth curve for the last 60 months. In the United States, an imbalanced warehouse demand-supply ratio is finally leveling out with each delivering 200 million square feet for 2016. Despite concerns and headwinds from slowing global trade, domestic markets look to have a repeat performance for 2017.
The consumer continues to demand agility, customization and convenience in today’s marketplace. This remains a perplexing algorithm for supply chain leaders as they balance service and cost with tighter delivery windows and labor constraints. Look for a proliferation of even more last-mile delivery centers in population clusters. High fashion, apparel, and electronics industries will invest heavily in their networks and infrastructure. The new distribution center might just be a 30,000-square-foot repurposed shopping center or neglected office building in the urban core.
Given the duration of this recovery cycle, what challenges should we expect for 2017? First, owners and investors of industrial real estate have seen rents grow and returns increase, especially in primary markets. The results are increased operating costs, rent inflation, labor shortages, and margin pressure. For shippers, this leads to a fixed vs variable cost impasse. Real estate owners entrench on firm return expectations. Retailers rely upon flexible, nimble pricing models. Second, given the cyclical nature of real estate, there is a risk of overbuilding, especially on the edge of a recession. This risk should be tempered as investors are much closer to logistics company needs than ever before and able to dial back new deliveries more efficiently.
We expect 2017 to look much like 2016. Despite global trade lethargy, carrier consolidation and historical cycles, our industry should fare well. If consumer optimism stays the course and does not lead to speculative overbuilding, the next year should continue to be another strong performer.