Amid positive national jobs growth and the looming threat of the Delta variant of COVID-19 threatening the economic rebound, the industrial real estate market has experienced tremendous growth in demand as people return to work.
“Absolutely, if you are a landlord right now, it is the best of times because [the] industrial [sector] has had no slowing down,” Savills (LSE: SVS.L) Executive Vice President Gregg Healy told Yahoo Finance Live. “You can pretty much ask what you want for rent, and people come knocking on your door trying to lease that space up, particularly in the major industrial markets.”
However, Healy said, circumstances are quite different for those looking to rent industrial real estate property.
“If you're a tenant on the other side, [you’re facing] big challenges,” Healy added. “It's really tough right now. You're seeing rent increases of 10% or more in certain markets.”
Healy joined Yahoo Finance Live to discuss the state of the industrial real estate market as well as investor hotspots in the space. Savills plc is a London-based global real estate services provider listed on the London Stock Exchange (LSE). The company operates from over 600 offices across 70 countries, and currently employs over 39,000 people.
According to Healy, e-commerce and the pandemic have been the two driving forces behind the industrial real estate boom. He cited 300 million square feet of industrial real estate absorption in the U.S. last year and more than 252 million square feet of industrial square footage across the country going on the market this year as being the main indicators of the boom. Healy forecasted that another 342 million square feet will go on the market in 2022.
“So over 700 million square feet — in the next 2 and 1/2 years — of industrial square footage [will add] to our current inventories to help alleviate some of the challenges we've seen in this market,” Healy said.
As for investment opportunities, Healy said that it is important to “go where the people are.” He noted that because markets in the South and Southeast are seeing some of the highest population growth rates in the country, more industrial resources are being allocated to those locations. The northeast, however, yields a different story.
“The northeast has been flat, and some areas [are] declining,” Healy said. “Those areas, I think, are a little bit more suspect when it comes to investment for industrial real estate. Unless you're looking at maybe repurposing existing sites to get closer, and have an advantage there for transportation purposes specifically.”
Can the momentum be sustained?
As the pandemic was seen as largely responsible for the e-commerce boom, the question of whether or not the uptick in industrial real estate demand will remain. Healy said Savills anticipates e-commerce growing to comprise 26% of all retail sales in the U.S. by 2025. In addition, he estimated that every billion-dollar increase in retail sales and e-commerce will require 1.2 million square feet of industrial property.
If these forecasts prove true, Healy said that there may even be “higher threshold industrial requirements” that Savills has not yet considered, further bolstering the demand for property. However, the rate of expansion in e-commerce is expected to slow slightly within the next couple of years as consumers readjust to the acceleration initially brought on by pandemic conditions and return to brick-and-mortar stores.
“We have, right now, [the] highest number of people working in manufacturing in 37 years, but we still have a deficit of 500,000 people working in those spaces,” Healy said. “So if we can continue to reinvest in the United States, and bring some of those jobs to the United States, we'll still have a large requirement for industrial space.”