After the most impressive run in its history, the U.S. industrial property segment is heading into something it hasn't witnessed in nearly a decade: A slowdown.
For the first time since the end of the Great Recession, industrial activity, measured by a key metric known as "net absorption," will be flat year-over-year in 2019, according to a forecast from real estate and logistics services giant JLL Inc. JLL If accurate, the reading would end 8 consecutive years of positive US net absorption, where demand for property exceeds supply.
In a phone interview today, Craig Meyer, president of JLL Industrial, Americas, said the projected slowdown will be due to softening demand rather than oversupply hitting the US market. An extended economic recovery cycle, a rising interest rate environment, geopolitical uncertainty, and the festering U.S.-China trade dispute will combine next year to give decision-makers pause before they commit to projects with nine-figure price tags, Meyer said.
In addition, some industrial markets, especially those in and around seaports, already have such low vacancy rates that there is effectively no space to accommodate any additional demand, Meyer said.
Top-tier markets that will likely flatten next year include Dallas and Chicago, where vacancy rates may slightly rise, Meyer said. Atlanta, one of the top-performing markets for the past several years, will continue to show strength, while California's Inland Empire, 65 miles from the Ports of Los Angeles and Long Beach and the country's largest warehouse and distribution complex, will remain hot, Meyer said.
Meyer emphasized that 2019 will be a year of the "pause button," and that it doesn't come near to signalling the end of the current cycle. Nationwide vacancy rates are at an all-time low of 4.2 percent, with some of the strongest markets at rates of under 2 percent, according to JLL data, which is generally corroborated by other industrial property sources. Emerging from the Great Recession, nationwide vacancy rates were, on average, at 10 percent, Meyer said.
Vacancy rates have hit all-time lows quarter-after-quarter and year-after-year, significantly pushing up asking rents and drawing billions of capital from domestic and international financiers attracted by high-quality real estate in economically solid markets and regions.
Supply levels will remain constant, and the ecosystem of developers, lenders, lessees and lessors will stay disciplined in their investment approaches, according to Meyer. As with other types of real estate, industrial demand collapsed during the financial crisis and recession. However, the industrial segment entered the downturn not nearly as overbuilt and overleveraged as the retail, office, and residential markets. As a result, when the economy gradually improved and ecommerce growth triggered strong demand for big fulfillment centers, suppliers of space were operating from a position of strength because of their fiscal prudence prior to the downturn.
Don't miss it. Register today.
Long-term, Meyer said that additional demand will come from the grocery segment, where online ordering, which today accounts for about 2 percent of all grocery sales, is expected to rise at a consistent and relentless pace. The industrial property space is expected to be right in the middle of decisions by producers and retailers on how to calibrate their dry goods and cold storage between stores, warehouses, and delivery services.
Another major macro trend will be how traditional retailers develop and refine their e-commerce strategies and integrate them with their brick-and-mortar infrastructures as part of a customer-friendly omnichannel strategy, Meyer said. This will push continued growth of urban infill centers that are positioned close to large population centers in dense markets, Meyer said.
The executive said he is bullish on the mixed-use industrial-retail model where a property will have a combination of storefronts and distribution centers. Brick-and-mortar, Meyer said, is hardly dead, though its definition may change along with the dynamics of commerce.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
