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Tuesday, June 25, 2013

An Industrial Building, The New Shopping Mall

By Erik Foster (Chicago)

E-commerce has become the darling of the post-recession retail economy as online sales push past $225 billion, growing 15.8 percent in 2012 alone.  Going forward, the industry is expected to grow at a compounded annual average rate of 10 percent over the next five years, creating tremendous opportunities for owners and developers of industrial distribution space to capitalize on this growth.  The demand for industrial space will increase with the importance of the e-commerce distribution; conversely, this will be to the detriment of the retail sector, so investors must be aware.

One of the greatest benchmarks of the demand for warehouse and distribution space is the significant increase in the amount of occupied space. Since 2000 the amount of occupied distribution space has increased by 86.2 percent, from 459.3 million square feet to 855.1 million square feet at the end of Q1 of 2013.  While not all of the increase in occupied space was allocated to e-commerce, this change of almost 400 million square feet represents a significant average annual growth rate of just over 7 percent.  Conversely, during the same period the level of occupied retail space increased, but at a substantially lower pace, a paltry 1% annual average.  Since 2000 the level of occupied retail space increased 10.9 percent, moving from 5.6 billion square feet to a current level of 6.3 billion square feet.

The rational to invest into industrial product becomes not just an asset allocation, but an opportunity to gain another access point to the general public.  Industrial is becoming “consumer” real estate.  Although there is momentum with "on-shoring" of manufacturing in the US, e-commerce tenants really are the factories where the final assembly and shipping of goods occur.  Consequently, I believe the current trend of increasing speculative development, improving rental rates and strong demand from investors will continue within the industrial asset class for quite some time.  Furthermore, e-commerce will play a significant role in the national industrial product market, a sector that saw more than 151 million square feet of new development since 2010 at the height of the post-recession economy.  

For further detail and industrial capital markets analysis on this subject, please see my latest white paper E-Commerce Fueling Demand for Industrial Product.

Monday, June 3, 2013

The Houston Economy - Boom and Bust

By Rand Stephens (Houston)

The naysayers of Houston’s economic success like to point to the energy business as the main driver, and that the city’s economy is not diversified and subject to a collapse based on a drop in energy prices. This is an outdated view of Houston’s economy that dates back to the 80s.

There are now four economic power centers in the US. They are New York City for Finance, Washington DC for Government, Houston for Energy and San Francisco/Silicon Valley for Technology (the “Big Four”). Each of these centers are similar in that they have the infrastructure and intellectual capital that allow businesses in these industries to operate most efficiently by being in these locations.

While the common thought has been that cities with economic diversity are best from a real estate investment perspective, it appears that specialization is the way to go as it fuels growth and mitigates the downside when there’s an economic downturn. The Big Four are not only the fastest growing major markets in the US, they also have been the quickest to recover since the Great Recession.

The cause of the Great Recession was a debt problem...not enough of it, as the lending markets shut down; with everything so highly leveraged, it’s no surprise that we had a major economic meltdown..."live by the sword, die by the sword".

The Houston economy has recovered faster than the rest of the country because businesses, consumers and real estate weren't as highly levered as other places around the US. We've "been there, done that" in the 80s, and lenders have loaned cautiously in Houston since then.

The Boom and Bust reputation that Houston has endured since the 80s isn’t because our economy lacks economic diversity; it’s about debt, and the potential for getting over levered as investors look to ride the energy wave. So far, the lenders have remained disciplined and the city’s fundamentals look great.

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.