Five Trends That Will Shape the Industrial Sector in 2016
By: Aaron Ahlburn, senior vice president and Americas director of research, industrial, JLL
Winter 2015 2016
Changes in the ownership, investment, retail, fulfillment center and supply chain landscapes will have big impacts on industrial real estate.
ALL EYES ARE ON the Industrial sector for a variety of reasons. Retailers and other warehouse occupiers are growing their distribution center footprints across the U.S., and e-commerce continues to stake its claim on the fulfillment and “last mile” landscape. The sector will also continue to see growing interest from foreign investors, and the Panama Canal expansion set to open in spring 2016 will help reshape supply chains and industrial development. Below are five themes to watch for in 2016:
More change in the ownership landscape. Thanks to a series of large-scale portfolio deals over the last few years, the overall ownership landscape for industrial and distribution properties in the U.S. is experiencing a significant shift toward institutionalization. That means that more Class A industrial and distribution center real estate will sit in the hands of increasingly fewer owners.
The evolution of the U.S. industrial segment toward institutionalization has been driven by a plethora of global forces. It has particularly benefited from the mounting number of investors that are allocating increased amounts of capital toward investment in alternative assets like commercial real estate (CRE), as the U.S. industrial segment offers wider spreads over risk-free investments than other CRE segments. With an estimated $60 billion in completed and forecasted sales for 2015, current deployed capital is seeking the low-risk, higher return opportunity with which institutional investors have become increasingly comfortable in the industrial segment.
Foreign investment will continue to grow. JLL research found that offshore-driven capital has exhibited its largest participation of industrial sales volumes in 2015; it is scheduled to account for over $20 billion in total investment and 37.4 percent of 2015 buyer activity by the end of the year. Singapore, in particular, has emerged as a prime investor in industrial real estate, driven in large part by Global Logistics Properties’ (GLP’s) immense acquisition of IndCor Properties (IndCor) and its under contract acquisition of Industrial Income Trust (IIT). The $8.1 billion and $4.6 billion acquisitions will push total foreign direct investment in industrial real estate 323.6 percent higher than 2013 and 2014 volumes combined. With these two transactions, Singapore-based GLP also became the second-largest logistics property owner and operator in the U.S. In 2016, JLL expects expect foreign investment in the sector to continue, with buyers coming primarily from Asia, the Middle East, Europe and Canada.
Retail will drive demand for smaller industrial facilities in or near urban centers. As Howard Schultz, CEO of Starbucks, said in part, “… the Internet as we know it today is literally the death of distance.” For brick-and-mortar and e-commerce retailers alike, the “last mile” means striking the not-so-simple balance among delivery time, service and cost. Companies will continue to test same-day delivery services. Industrial developers need to be aware that service delivery factors now shape real estate decisions more than ever before, and that even seemingly minor efficiencies can lead to benefits in not just today’s — but also tomorrow’s — ultracompetitive consumer environment. Recognizing the importance of distance to customer delivery, it is notable that operations located within the 20-mile ring of major cities typically handle fast-moving, high-cost and time-sensitive products like mobile phones and groceries, while those located more than 75 miles outside of those areas tend to be “big box” distribution or fulfillment centers that handle slower moving, lower cost, less time sensitive products like furniture and discount apparel.
As e-commerce logistics space continues to evolve for larger-scale needs, location choices also are being drastically influenced by incentives from local, county and state governments, once a company has identified two or three viable location options. At the same time, e-commerce logistics space will continue to move closer to the consumer, and is expected to put leasing demand pressure on many infill locations. It will also put pressure on building owners to enhance the functionality of their older assets.
Maximizing fulfillment center location strategies. In 2016, location decisions, especially for e-commerce fulfillment centers, will be strongly influenced by workforce availability, including access to seasonal workers during the holiday shopping season. Another important factor for industrial developers and owners to consider includes the critical investment in ever-improving automation techniques to make picking, packing and sorting more efficient.
As delivery strategies evolve, distribution centers will have new purposes within their respective supply chains. For instance, some retailers have already partitioned their warehouses to accommodate multiple operations, including wholesale operations, store inventory replenishment and e-commerce fulfillment. In addition, as supply chains continue to grow in complexity, functionality within the “box” will need to be addressed as well, from sort center locations to returns, and fulfillment to distribution, etc. Wholesale mixing center operations need larger footprints to keep more types of inventory on hand for delivery to regional retail stores. They also require proximity to FedEx, UPS and USPS ground sortation hubs, as well as employee and trucking accommodations (parking, queues and amenities, etc.), for e-commerce fulfillment operations.
Managing supply chain risk will remain a challenge. JLL research indicates that supply chain disruptions cost an estimated $2.3 billion annually and come from all areas of the world. Distant events such as the Tianjin Port explosion in China and the Greek debt crisis can profoundly impact supply chains. Therefore, prudent industrial developers and owners keep in mind how macroeconomic events will impact their primary customers.
For supply chain managers, one top-of-mind issue is risk management — diversifying manufacturing and sourcing by using a combination of transportation strategies, including intermodal truck and seaport options to get goods to their final destination. The pending expansion of the Panama Canal will influence both the global and domestic supply chains — and industrial development — accordingly. For instance, automotive manufacturing has grown exponentially in the Southeastern U.S. in recent years; seaports like Savannah and Charleston offer access to Western Europe, while an expanded Panama Canal will allow the passage of larger vessels to and from Asian markets. The sector will also see investment and leasing activity across the U.S. become more complex and integrated.
Gone are the days when distribution center development and investment was a relatively straightforward process. As the world’s global supply chain has become increasingly sophisticated, so have the needs of industrial real estate users.