Publications

- July 1, 2019: Vol. 6, Number 7

Warehouse demand wearing thin: Data finds industrial real estate’s golden run is ending

by Mike Consol

Industrial real estate — widely considered the “property type of the year” for years running — might be seeing its reign come to an end. According to a new forecast published by the Deloitte Center for Financial Services, it may not be easy for the industrial sector (encompassing warehouses, distribution centers, flex spaces and other industrial buildings with storage facilities) to sustain its momentum over the next few years.

The report points to potential shifts in the marketplace, including market oversupply, rising interest rates and a higher cost of capital, that will likely result in a slower pace of growth for this sector. Industrial has been one of the few traditional property sectors that has sustained demand in the past five years, earning its status as a favored property type. Even now, the report is forecasting that industrial real estate demand will increase by 850 million square feet to 14.8 billion square feet by 2023, driven partly by a 15 percent annual growth rate in e-commerce sales.

However, the report warns, the pace of demand growth will be slowed by rising supply and higher costs of capital, as economic growth slows in 2020. Over the next three years, the annual demand growth rate will likely decline to a little below 0.9 percent, about one-half of 2018 levels, and supply will likely rise from 7 percent in 2018 to 10.3 percent by 2023. What’s more, the cost of capital is expected to increase from 5.1 percent at the end of 2018 to 6.4 percent by 2023.

While current data paint a rosy picture of warehousing, the looming deceleration in demand growth is going to put pressure on real estate owners to become more creative in purchase and use of industrial real estate, the report says. More than 30 percent of U.S. warehouse buildings are over 50 years old and the average age of all warehouse properties is 34. Given the rising cost of capital and ballooning supply, retrofitting spaces, identifying new warehousing models, and developing smarter facilities will become necessary.

To read the complete report, go to this link: https://adobe.ly/2XAItBj

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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