The savviest will succeed in potential pause year for industrial real estate

CHICAGO, Dec. 19, 2018 – After several quarters of record-breaking high rents and low vacancies, the U.S. industrial real estate sector is likely to hit the pause button in 2019, according to JLL experts. That’s good news for savvy owners, investors and occupiers positioned to exploit a new window of opportunity.

Amidst modestly rising interest rates, the U.S. economy has cooled somewhat in recent months, according to JLL economic research. Corporations are back to business as usual following an initial boost from tax reform, while tariffs and trade tensions are creating supply chain and market uncertainty. Record-low unemployment and labor shortages are keeping many companies from adding capacity to support further growth.

For the industrial property sector, slowing economic growth has an upside.

“We’re entering the late phase of the business cycle, but even a pause year in 2019 will have a silver lining,” said Craig Meyer, President of JLL Industrial, Americas. “We have an opportunity to close the gap between demand and supply of industrial property—and that gap is significant. Industrial vacancy is at a record low of 4.8 percent, even as new space comes online quickly.”

May the street-smart succeed

Only some companies will be positioned to thrive in this changing environment. Access to data and insights, along with a street-level understanding of market-specific dynamics, will be the defining characteristics of successful service providers, owners, investors and occupiers.

“While anyone can succeed in a rising tide, only smart operators thrive in a slowing environment with an uncertain outlook,” Meyer said. “In this environment, it’s the operators who combine knowledge, experience, discipline and data-driven insights that will prevail. Being street-savvy is the right strategy for today.”

JLL predicts what “street-savvy” will look like for occupiers, developers and other parties in the industrial real estate marketplace:

Savvy occupiers. E-commerce and logistics companies will continue to drive industrial real estate leasing as last-mile delivery become increasingly critical. Keen operators will view total occupancy costs as encompassing not just rents, but also the cost of inventory, transportation and labor for last-mile deliveries. They will pinpoint their last-mile delivery strategies around locations where population nodes and density intersect with the optimal demographics for their unique customer base.

Savvy occupiers will understand how the bricks and clicks fit together and will use data and analytics to determine whether and where they need physical storefronts versus fulfillment and distribution centers. They’ll bring logistics managers into the real estate conversation for a holistic view of their supply chains.

“Is it better to have a fulfillment center closer to urban areas to avoid transportation costs and potential traffic jams?” said Rich Thompson, International Director, Supply Chain & Logistics Solutions, JLL. “Or are urban infill locations too costly? Where is labor and at what cost? Access to customers is as important as rent when you’re moving large volumes of merchandise. These considerations are driving urban infill logistics decisions.”

Visionary developers. Savvy industrial property developers are watching demand trends closely, while envisioning new kinds of facilities to support last-mile deliveries in urban areas. Innovative entrepreneurs will come to the forefront to address the need for innovative, one-of-a-kind fulfillment and delivery facilities, including multistory urban infill centers commanding high rents.

Savvy developers will also pursue intermodal inland port opportunities, as cities like Salt Lake City, Phoenix and Denver seek to connect by rail to sidestep the shortage of trucking capacity.

“We can expect to see continued growth in intermodal logistics as a critical part of the overall U.S. supply chain to counter traffic congestion, skyrocketing transportation costs and the truck driver shortage,” said Walter Kemmsies, Managing Director, Economist and Chief Strategist of JLL’s Port, Airport and Global Infrastructure (PAGI) group. “And, with the re-shoring of manufacturing, enterprising developers will pursue new opportunities for intermodal services and logistics real estate, especially in the automotive and industrial goods sectors.”

Street-smart investors. The slowing market will favor the industrial property investors with the deepest understanding of the sector. Pressure on investors to deploy capital in a rising interest rate environment will drive nuanced investment strategies with a growing focus on secure assets and markets.

“Sharp investors will return to their roots and challenge prevailing assumptions about the market,” Meyer said. "2019’s word of the year for the industrial sector is 'savvy,' and the savviest will be those who really understand specific markets at the street level."