Strong consumer spending and the rise in housing construction activity are currently the prime factors for the incredible rebound of the U.S. industrial real estate sector, and experts say as home buying continues to increase, so will demand for warehouse space.
Growth in e-commerce was the catalyst for the return of the U.S industrial sector after the recession. However, the new story is the improvement in the housing sector. Housing permits, starts and completions have been rising quickly in the past two years. The U.S. Commerce Department recorded a 25.4 percent increase in building permits authorized in May, from about 1 million permits nationally in May 2014 to almost 1.3 million this year. Housing completions increased 14.5 percent to a little more than 1 million in May 2015, up from about 903,000 homes the year prior.
Home sales are strong as well. Pending home sales rose in April for the fourth straight month, reaching their highest level in nine years, according to the National Association of Realtors (NAR). The NAR predicts new housing starts should hit 1.4 million units in 2016, up 40 percent from 2014, and existing sales are forecast to reach 5.5. million units next year, an increase of 20 percent year-over-year.
Experts say that all the home building activity will likely lead to strong demand for the warehouse industry. Josh Harris, a professor of real estate at the University of Central Florida and a Fellow at the National Association of Industrial and Office Properties (NAIOP), notes that the return of the housing sector will drive the need for big-box industrial space, as building products and materials need to be stored and shipped across the nation. He also predicts that light industrial space will see a boost in demand as well.
“Many construction tradesmen operate out of warehouse industrial parks, such as your sub-contractors, your plumbers and cabinet makers,” Harris says. “Home building will be a big industrial sector this year, especially with the weakening of sectors such as the oil and gas industry.”
Both e-commerce growth and the housing boom have translated into a strong U.S. warehouse sector, according to a recent industrial forecast from real estate services firm Cushman & Wakefield. With a 6.7 percent vacancy rate, the warehouse sector has now posted 19 consecutive quarters of declining vacancies, and there’s a projected occupancy gain of 380 million sq. ft. by 2017. Many of the properties that are in the construction pipeline for the next three years are larger than 100,000 sq. ft., meaning demand will tighten even further for the smaller buildings.
David Egan, Americas head of industrial research for real estate services firm CBRE, says all this new home activity will strengthen the industrial sector. Home-related retail chains such as Home Depot and furniture stores need to store their goods in large warehouses, competing with the demand from e-commerce sites. Egan adds that light industrial building, especially those containing fewer than 200,000 sq. ft., should also see occupancy increases from home-related businesses. “Brokers in almost every market are saying that small users are really starting to step up in the market this year,” Egan says.
Light industrial makes up about 60 percent of the national industrial market, and Egan says this sector historically had dominated in demand and development before the explosion of e-commerce. Following the e-commerce boom, however, larger spaces became more in demand. In the past year, however, demand for light industrial space has surged back again, Egan says.
As a result, the light industrial sub-sector will be the best space to look at for investors, if they go in with knowledge of the particular sub-markets.
“I think this segment will grow rapidly in the next year and a half, there’s a lot of runway for rents to grow and availability to shrink,” Egan says. “And there’s not a lot of new development. You get in now and pick the right locations you’ll see an increase in value just due to rent increases alone.”