Last year was momentous for US industrial real estate. Record demand for warehouse and distribution space topped more than 250 million square feet as companies continued to expand their real estate footprints and adapt their supply chains to reach customers in urban centers. And despite widespread uncertainty about the global economy and a new US political era, 2017’s industrial real estate market exhibits potential for similar momentum.
Among the key considerations for the industrial real estate sector in 2017 is the pressing need for infrastructure investment. As significant upgrades are planned for America’s obsolete roads and bridges, raw materials will be needed; these materials demand warehouses to store them, and even the current rapid warehouse development pipeline cannot keep up with demand. In fact, the national industrial vacancy rate is at a 16-year low entering 2017, pushing under 6 percent.
Investing in the Rust Belt’s infrastructure, for example, would mean reviving dozens of Mississippi waterway terminals. Already zoned for industrial use, these ports are being repurposed to transport materials needed to build infrastructure for industries that are driving the US economy. This, in turn, could push demand for industrial real estate in key markets such as Kansas City and St. Louis, which are benefiting from, among other positive economic trends, high entry barriers in primary markets such as Chicago or Philadelphia. Aside from the Mississippi waterway, occupancy growth in alternative markets such as Tampa Bay, Charlotte and Richmond could be something to watch in 2017.
In fact, we have found that companies are continuing to expand and restructure their distribution network across the nation by entering new markets, with nearly 14.5 percent of third-quarter lease transactions over 50,000 square feet signed by tenants new to the market. This was mainly down to e-commerce players seeking the best location for effective last-mile delivery.
As last-mile efforts still dictate where, what type, and how many distribution centers companies require, 2017 will likely see an increase in the creative re-use of assets and infill development in or near urban cores. Multistory warehouses, a trend seen in land-constrained markets in Asia such as Tokyo and Singapore could be a solution in high-density US locations such as Seattle, Los Angeles or New Jersey. Similarly, more and smaller urban distribution centers are starting to appear around our nation’s cities to meet those aforementioned last-mile targets.
E-commerce will continue to drive growth for this industrial space across the country. The potential for port terminal investment in the coming year could mean that the Mississippi waterway reclaims its spot in the global supply chain, and along with it, more demand for warehouse space. Following 2016’s record demand for industrial real estate, and even with some economic uncertainty, 2017 looks poised to be an interesting and fruitful year for the sector.