The rise of e-commerce over the past decade, including record growth during the pandemic, has put industrial real estate in a strong position. Traditionally leased by manufacturing and retail companies, the industrial sector has expanded as e-commerce and distribution companies moved into the space. Now, warehouses, storage facilities, and distribution centers are valuable assets in this market.
With growth forecasted for this real estate class, investors can potentially benefit as demand and rent prices continue to increase.
Below is an explanation of what industrial real estate is, along with three key reasons we think now is the time to consider investing in this sector.
What is industrial real estate?
Industrial real estate encompasses any land or buildings that are used for industrial activity. Traditionally this has been production, manufacturing, and assembly, while there has been an increased market need for warehousing, storage, and distribution in recent years.
Flex warehouses are popular as they can be used by a variety of businesses depending on their needs, and will usually include offices in addition to warehouse and production space.
The sector has hit records nationally across several metrics lately and there are several reasons to consider investing in this asset class. (1)
Industrial vacancy rates have hit an all time low
Industry reports show that vacancy rates in the industrial sector have dropped below 4% for the first time since tracking began in 1995, marking a 27–year low. (2) The average vacancy rate across the U.S. is at 3.3% as of Q1 2022, with availability even lower in areas such as Central Pennsylvania, Columbus, Northern New Jersey, and Southern California. (3)
Supply chain and inflation have contributed to delays in the construction of new industrial facilities and demand is outpacing supply.
Rents rising in the industrial sector
Along with the tight market conditions and competition for properties comes record-breaking rising rents, with YoY growth of 15.2% in the industrial sector in Q1 2022. Asking rent PSF is approaching $8 for the first time in history, reaching $7.89, and rent growth is expected for the rest of 2022 and beyond. (2)
A total of 77 industrial markets saw positive rent growth YoY in the first 3 months of 2022, while 67 markets had positive growth QoQ. (2)
Demand for industrial space continues to be strong
While the record growth of e-commerce has slowed post-pandemic, this industry is still in a strong position and will continue to add to the demand for industrial space into the rest of 2022 and 2023. (2) Construction of new space is underway, however some of this is impacted by supply chain issues, as well as inflationary pressures that can slow the construction process down.
Approximately 28% of industrial space currently under construction is pre-leased meaning that despite the new developments that will be delivered, the supply will not yet catch up on demand. (2)
With this continued demand, combined with record-breaking rents and vacancy lows, industrial real estate is worth considering for investors seeking to diversify their portfolio.
Our latest industrial deal is capitalizing on these strong fundamentals, with an asset that has a triple net lease and built in rent increases for 3 consecutive years. Log in to our platform to find detailed information.
(1) Source: Real Deal: US industrial market hit records across several metrics in Q3
(2) Source: Cushman & Wakefield US Industrial Q1 2022 Report
(3) Source: Savills U.S. Industrial Market Update