Distribution centers, warehouses, manufacturing, and other ugly ducklings used to take a back seat to glossy office buildings and gorgeous new apartments.

Over the last decade the market has been flooded with these beautiful buildings, but this increased interest has resulted in these assets being overvalued and over built in the last few years. Meanwhile, industrial assets, in all their forms, are coming out as beautiful swans for both real estate investors and corporate occupiers. Low vacancy rates and high demand for warehouse space are forming perfect conditions for the sector in 2018, according to experts.

“E-commerce activity is really driving the industrial sector’s success,” said Craig Meyer, President of JLL’s Industrial group, Americas. “It represents around 9 percent of total U.S. sales, and experts predict this could reach nearly 14 percent in the coming years. These figures, along with a strong global economy, indicate that demand for industrial space will only increase in 2018.”

Meanwhile, according real estate research firm Real Capital Analytics (RCA), the industrial sector, seeing gains from rising e-commerce sales and the resulting need for industrial facilities, was the only commercial real estate sector last year that saw an increase in transaction activity from January through December.

Top five growth drivers in 2018

Here are five reasons the industrial real estate market is soaring in 2018:

1) The three Ts of Trump – Trade, Tax and Transportation infrastructure. While there is no explicit strategy being released from the White House, the dominos seem to be falling in a way that suggest 2018 is the year for major infrastructure legislation. Trade agreements are being re-negotiated and the tax bill is released, so the doors could open for infrastructure. The urbanization of U.S. cities cannot continue with functionally obsolete roads, bridges and other infrastructure. The recent bridge collapse in Florida confirmed these challenges. As upgrades are planned, raw materials will be needed and warehouses to store them.

2) E-commerce continues to set records. Online shopping and consumer demand for rapid delivery is changing what, where, and how many distribution centers are needed to feed the consumer e-commerce beast. E-commerce continues to be the fastest-growing sector. In 3Q 2017, nearly 25 percent of total U.S. leasing demand came from e-commerce companies expanding their existing market footprints.

3) Urban logistics move closer to the customer. In a bid to narrow the gap with brick and mortar stores, e-commerce and its related logistics companies are looking to accelerate their investment in “last-mile” warehouse spaces. Global and domestic tenants are expanding their presence beyond a single mega-warehouse facility to multiple U.S. nodes, using logistics space to extend their reach to connect with customers. At the same time, distribution models are changing and location strategy is more focused on proximity to labor and customers. As e-commerce operations mature, tenants will seek smaller distribution centers closer to urban cores, but finding the right location will become challenging.

4) Continued investment in the darling of U.S. real estate. Investor interest is higher than ever, as institutional capital still views industrial property as a lucrative investment opportunity. Investment sales are up 34.7 percent this year and there is a resurgence in industrial real estate portfolios.

5) The Fourth Industrial Revolution is well underway. The robots aren’t coming—they are already here. Human-free warehouses are a long way off, but sophisticated automation is becoming a feature of today’s industrial buildings. It’s already possible to offload goods from a truck, put them on a pallet and onto a different truck with barely a helping hand from a human being. At the same time, drones equipped with sensors can now scan barcodes for inventory purposes, safely restock and pick merchandise on high shelves, and move small items quickly around the warehouse. Automation within the warehouse is an important emerging trend that will continue to develop. This will reshape how warehouses are designed and how they are used.

These five factors and smart infrastructure investment could nurture economic growth, which is especially needed in cities and states that have lost economic momentum with the decline of manufacturing. Investing in export-related infrastructure is also critical to balance trade deficits and would especially benefit agriculture, capital goods and energy, which are the most competitive sectors of the U.S. economy.

Where is the Industrial Market Heading in 2018

Here are 4 ways the market will continue to evolve in 2018:

1) Industrial activity will continue to thrive. There is no indication of a slowdown in this sector for 2018, says Peter Muoio, chief economist at Ten-X, an online real estate marketplace. During the latter part of 2017, new demand drivers, including e-retail warehouse distribution and fulfillment space, cloud computing and facilities for legalized cannabis, supported much of the demand in the segment. However, Muoio expects there to be an increased demand from traditional users of industrial space, such as industrial production companies. “You’re in a sweet spot for 2018 in the industrial segment,” he notes.

2) Oversupply is creeping up as a concern. Vacancy rates for the sector are the lowest they have been in recent memory, Muoio notes. However, while not an immediate concern, Muoio says he is watching to see if the industrial sector starts to see supply pick up too much. “We are seeing supply pick up, so we’re keeping an eye on that,” he says. While supply does not yet appear to be getting ahead of demand, there has to be a balance, notes Walter Kemmsies, managing director, economist and chief strategist for real estate services firm JLL’s U.S. ports, airports and global infrastructure group. Markets saturated with one type of industrial asset—such as only large distribution centers—can create issues down the line. “Too much of one means too little of another,” Kemmsies says. “[It] becomes a bottleneck.”

3) Infrastructure issues won’t disappear. With the proliferation of e-commerce and omni-channel retailers—coupled with a growing economy—there has been investment in distribution centers and warehouses. But as for the transportation infrastructure needed to support them? Not so much, says Kemmsies. Yet with an increase in inventory, there comes an indication that supply chains are less efficient, he says. “Every industrial real estate investor has to monitor that and [ask] how does this resolve? How does this get back on track?”

4) The Midwest holds promise for growth. This region of the U.S. is poised to see benefits related to President Donald Trump’s tax reform and push to keep jobs in the country, as manufacturers may be more willing to return to the region, says Jay Rollins, managing principal and co-founder of JCR Capital, a Denver-based financial firm that provides capital, debt and equity for middle market real estate acquisitions. “We do anticipate that we are going to see better leasing and less disruption in the rent roll in 2018 in the industrial space due to the tax cuts,” he says. Witmondt, of Woodmont Industrial Partners, says opportunities also lie in North and South Jersey, given their proximities to the densely populated New York City and Philadelphia markets. Central Pennsylvania and Atlanta also show promise, given the population growth in those regions, he adds.

In conclusion, the Industrial Sector has many growth drivers that will continue to propel it to further growth in 2018 and continue to position it as an attractive investment for real estate investors. Wilson Investment Properties continues to seek and find industrial assets, from multi tenant flex-space, to manufacturing NNN tenants and everything in between. Over 30 years of experience investing in the space has allowed us put together high quality industrial real estate investments for our investors.

References

JLL. http://www.us.jll.com/united-states/en-us/news/4871/industrial-real-estate-trends-2018 Dec, 2017.

National Real Estate Investors. http://www.nreionline.com/industrial/four-predictions-industrial-market-2018 Jan, 2018.