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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.

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