The single-tenant net lease industrial market had another tremendous year of activity in 2019. Coming off 2018’s record setting levels of investment sales volume, where more than $32.0 billion of product traded, 2019’s totals were on par. This back-to-back strong level of investment activity points to a trend that has been growing in recent years – net lease investors continue to be infatuated with industrial product. And for a good reason. The way in which we consume goods is evolving rapidly, and the industrial market powers our consumer-driven economy – manufacturing and storing goods, ensuring distribution to retailers is done in a timely manner, and more recently, finding creative ways to put the most urgent of goods in consumers’ hands the very same day. Here, we’ll look at top trends impacting the industrial and logistics sector, and we’ll consider how these trends may influence the investment sales market in the coming years.
In recent years…retailers have had to offer two-day, next-day, and even sameday shipping in order to gain or maintain market share against competitors.
Online sales continue gaining in popularity. But in recent years, the demand for faster delivery has increased, and retailers have had to offer two-day, next-day, and even same-day shipping in order to gain or maintain market share against competitors. But is this model cost efficient and sustainable? This is a question up for debate, and only time will answer. Right now, the focus remains on strategically building out the necessary infrastructure to meet increasingly tighter delivery timelines. For urban areas, this means significant investment in “last mile” facilities, and these may not be the glitzy or glamorous Class A industrial buildings we are used to seeing in this cycle. We will increasingly see investment in dated or functionally obsolete industrial sites, or even the retrofitting of other asset classes to serve a logistics function. And consider Western markets where population density can be extremely low outside of urban cores. In order for these consumers to be eligible for faster shipping times, retailers and distributors will need to grow strategically in order to balance the cost efficiency of infrastructure investment against the return from servicing these outlying consumers.
The continued rise of e-commerce has been influencing the retail and logistics markets for years, but it’s still a relatively new concept that companies are working to figure out. So much of today’s focus on e-commerce-related strategy and action is to prepare for the future – the industry has much to do to build out the model for efficiency and profitability. But this focus on future preparedness translates to outstanding opportunities for investors as logistics channels evolve and expand into new markets. We’re seeing this play out across the country, but nowhere is it more evident than in the non-core, lower density markets of the inland West region. As illustrated above, next-day and same-day shipping is being offered by more retailers to more customers, and companies will need to look at centrally located markets that can offer an abundance of inexpensive land for new developments – and states like Idaho, Wyoming, Nevada, Utah and others may be on the radar for the next distribution hub or bulk warehouse.
Pending an outside event or influence that slows investment activity prematurely, watch for activity across the net lease industrial sector to be robust but disciplined in 2020.
Much of the focus related to e-commerce and industrial/logistics growth has been getting goods and products to the retailer or consumer. But what about the reverse? Some experts estimate that between 15 and 40 percent of online purchases end up being returned. As retailers explore ways to offset the ever-increasing costs associated with customer returns, they may choose to evaluate their real estate strategies to realize cost savings. Could we see reverse “last mile” facilities pop up to accommodate return drop-offs? Or perhaps the introduction of a return locker concept offered by the logistics companies instead of the individual retailers? Maybe companies will choose to open new warehouse-retail stores where returns can be processed and then resold with minimal restocking and zero shipping costs? Regardless of the solution, real estate investors could be looking at the emergence of a new product type, or at least an increase in available supply of traditional space, and that creates opportunities.
These trends and others influences - coronavirus and the upcoming Presidential election, for example - will undoubtedly have an impact on the future of the industrial sector, but the foreseeable outlook remains bright. Preliminary statistics for first quarter 2020 indicate that we started the year strong. In the next year, we expect to see continued stability in core markets and enhanced interest in secondary markets, as there tends to be increased liquidity in non-core assets. And with debt still being very inexpensive, investors who have dollars to place will remain active yet discerning. Pending an outside event or influence that slows investment activity prematurely, watch for activity across the net lease industrial sector to be robust but disciplined in 2020.