KBRA releases research on the industrial sector, which is benefiting from positive demand factors but has headwinds on the horizon.

The growth in e-commerce is a key driver of demand for industrial warehouse space, which was amplified by the COVID-19 pandemic. In addition to e-commerce demand, lessons learned from pandemic-related supply disruptions have incentivized some retailers and wholesalers to hold additional inventory as safety stock and have also contributed to reshoring—the practice of bringing manufacturing and services back to the U.S. from overseas—by some manufacturers. These factors, combined with an already tight market with record low vacancies, have led to a record high construction pipeline. The top five markets with the largest construction pipelines are in Sun Belt cities. Growth in this region is a result of low availability and high rents on the West Coast in conjunction with population shifts. In addition, some U.S. companies plan to reorganize supply chains by manufacturing goods in Mexico and using facilities north of the border for distribution.

Much of the space coming to market incorporates features that increase the usability of industrial properties. It will also be designed to support robotics to enhance warehouse automation, which will have an ongoing importance in the face of labor shortages and wage inflation. The new construction will also support cold storage uses, which allows food and pharmaceutical products to last significantly longer and protect against disruptions due to supply chain issues as well as climate change. Further, the new supply will include sustainable as well as environmental, social, and governance features like the option to reduce electricity and the use of environmentally friendly building materials.

Although demand for this new supply remains strong, construction may start to cool in some parts of the U.S. as economic uncertainty grows and construction costs remain high. This will likely contribute to slowing rent growth and absorption as well as construction trends. Further, older properties may be impacted regardless of whether there is an economic contraction, as more recently built space with attractive features becomes available in the market.

This report is part of KBRA’s ongoing series on the secular trends that are transforming the “new normal” landscape in commercial real estate (CRE) across property types.

Click here to view the report.

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