Let me tell you a commercial real estate (CRE) story. It begins with the click of a “buy” button on an e-commerce site and – spoiler alert – it ends at the customer’s front porch, not a minute late.
With record supply chain disruptions throughout the Covid-19 pandemic, and more forecast already in 2022, how is this possible? The answer is the record rise of the industrial real estate asset class and the resulting construction of distribution or fulfillment centers that close the “last mile” gap.
As an industrial real estate investor, it’s important to understand the access points of this opportunity. So let’s dive into the data and explore some of the challenges, and the outlook through 2022 and beyond.
The rise of industrial real estate
Industrial has quickly become a predominant segment with certain asset types contributing to a dynamic growth trajectory. Whether big box distribution, smaller localized warehouses or flex office space, industrial asset types are now being sought out by investors as well as by lenders who finance these attractive assets.
What’s driving the growth is a secular trend that started before the pandemic and has grown only more pronounced with the pandemic: increasing e-commerce adoption and particularly the last mile delivery of goods. The last mile, according to Business Insider, is “the final step of the process — the point at which the package finally arrives at the buyer's door.” For delivery destinations that fall outside of cosmopolitan hubs, and even for city destinations hampered by traffic, this last mile has presented a huge logistical hurdle and opportunity.
And facilities to satisfy the market moment are springing up left and right. Just look at this chart, courtesy of Dodge Construction Network:
Points of market entry within e-commerce
E-commerce depends on managing supply chains and deliveries through routes that need facilities to sort, warehouse and distribute products. In addition, many e-commerce businesses integrate with local operators. Some may also require management to be present to oversee and coordinate operations. A point of market entry (or access point) that is well situated can be essential for e-commerce.
Real estate investors recognize the sure ROI in these asset types.
The benefits of industrial in a CRE portfolio
If nothing else, I’ve hopefully articulated the problem and solution which lead to this opportunity. But the benefits of investing in industrial real estate are many. Here are just a few:
- Warehouses go up comparatively fast. Average time to build in the U.S. was 81 days in 2019, according to the World Bank. While supply chain certainly has an impact on all construction, again, warehouses are a comparatively safe bet.
- Industrial assets offer up the meatiest ROI on the table. According 2021 research conducted by iPropertyManagement, the average 1-year return on industrial real estate property investment was the highest of any other property type, sailing in at 9.5%.
- The demand for last mile solutions, driven by Amazon, has staying power beyond the pandemic, making industrial an investment with long-term returns.
Headwinds for e-commerce?
There aren’t many, but two challenges present headwinds, and we’re keeping our eye on them:
Challenge 1: Old habits die hard. Some holdout customers still prefer a traditional purchasing experience in which they could try on clothing or select their own produce, as examples. E-commerce vendors are innovating solutions to overcome this hesitancy, but for the short term, many buyers choose brick-and-mortar retail.
Challenge 2: Supply chain dependencies. Supply chain delays have always been a risk for retailers, but the pandemic has been particularly problematic for e-commerce. We believe the supply chain difficulty will ultimately be resolved, but for now, it’s presenting some problems for e-commerce sales.
The 2022 outlook for industrial real estate
The e-commerce movement will absolutely continue. Growth isn’t limited to apparel and accessories and home furnishings. Demand is evolving to include a wider range of goods. Because of that growing demand, we are seeing manufacturers and distributors reorient their businesses to cater to e-commerce for the long term, and I don’t see that trend reversing.