The future of industrial real estate – what can we expect?

Author Lisa Stern Read bio
Tags: industrial real estate
Date: October 22, 2020

Industrial real estate is a crucial part of the global supply chain, that is the actuator of world’s market movement. The increase in consumption, trade, e-commerce and supply chain reconstruction are all key triggers and drivers of industrial real estate demand.

It’s no surprise many investors choose industrial real estate for stable cash flow and resilient valuations. 

Industrial real estate is what keeps the global economy in motion. High-quality industrial real estate, on strategically good locations, keeps the world’s supply chains operating, while enabling e-commerce and trade and providing efficient movement of goods, from production to markets.

Let’s talk about some of the key forecasts for the future of the industrial real estate, which was heavily impacted by this year’s sudden changes.

E-commerce sales will most likely drive warehouse demand

We have talked previously about the expansion of e-commerce in several of our blogs. This one is no exception. 

Even when we analyze historical data, retail sectors and manufacturing have driven demand for industrial real estate. However, due to many changes and fluctuations we have experienced this year, e-commerce companies had almost double-digit sales growth, which resulted in taking up more warehouse space to fulfill the growing needs of online customers. 

Sales are not the only reason why e-commerce companies need space. When products get returned, they take up space too. Customers are 3 times more likely to return a product they bought online, then a product bought in a retail store. Along with that, e-commerce companies need about 20% more space for the management of reverse logistics, compared to normal sales. 

Based on trends and analytics, it is estimated that there will be a demand for more than 800 million square feet of industrial space, in the next 3 years. 

Embracing the technology to match with tenant needs

For quite some time now, industrial real estate was left behind other commercial real estate sectors in technology adoption, but this is likely to change. Many tenants are looking for technologically advanced spaces. In many cases, tenants that do so are also investing in robotics and automation to lower their labor costs. 

It’s not uncommon for tenants to use automation in assisting in deliveries and product returns. Besides that, tenants are often looking for smaller spaces in key customer markets, instead of having one large space serving many different markets.

Warehouse owners or managers can help tenants by making spaces robot friendly and provide seamless connectivity both within and outside the facility, which doesn’t require a lot of structural changes. Multitenant spaces are also very desirable, which can be provided by owners. 

Smart facilities do stand out on the market and tenants are more likely to pay extra for them, even during hard times.

Warehouse storage space

High-growth area capitalization

One of the priorities of owners should be focusing on having a solid portfolio of properties located closer to population hubs. By doing this, they can help tenants speed up last-mile deliveries since customers are asking for shorter delivery cycle times increasingly.

There is a possibility that tenants might find the locations closer to consumers attractive, due to lower transportation cost. In order to have multiple properties at the right location, owners should reevaluate their portfolios and make smart decisions on which properties to sell, retain or acquire. 

Choosing warehouse spaces based on their historical data is no longer a thing. Yes, it is still a major factor, but should be combined with information about regional online sales, traffic movement and consumer behavior and lifestyle. After doing so, analytics can be used to really comprehend the impact on the warehouse market and build algorithms for future scenario prediction. Many owners don’t have the capabilities and knowledge to do this on their own and should hire a specialist to help them. 

Which changes are here to stay?

Considering most of these changes are the result of virus-caused reactions, their nature is temporary. However, that is not entirely the case here.

It’s crucial to acknowledge that some changes are here to stay, even when things return to normal, whenever that may be. For starters, let’s remember that many companies have adopted flexible work conditions, and many employees are now accustomed to working from their homes. While the possibility of returning to offices remains open, it doesn’t guarantee that they will be willing to do so. From the perspective of the companies – remote work comes with significant savings.

People have become very aware and take seriously the threat of unpredictable changes that can impact the industry they’re in. In order to prepare for future events, many businesses are avoiding lean inventory and instead choosing to keep safety stock. It won’t be uncommon for some companies to share their warehouse space with other businesses, and by doing that reduce risk and overheads.