The industrial real estate market had several strong years as supply struggled to keep up with demand. Then 2020 showed up and demand took off at an even faster pace. This doesn’t mean you should just throw your money into anything industrial right now, though. Here are four things industrial investors should know in 2021 to help make the smartest investment decisions.
Demand isn’t slowing down
There’s been an obvious increase in demand for warehouse space over the past year with the rapid e-commerce growth. However, quick growth in demand often means oversupply soon follows as a lot of investors and developers try to get in on the action at the same time. It doesn’t look like that’s going to be the case with industrial real estate, though. At least not anytime in the near future.
The growth in e-commerce is an obvious demand driver, and that alone will consume a substantial amount of new supply that becomes available in 2021. Items that used to sit on store shelves now need a warehouse to sit in. The biggest driver, though, is the growing expectation for online retailers to be able to provide one- and two-day shipping. This means they need multiple smaller warehouses spread out throughout the country instead of just a couple of large ones in major hubs.
Another issue causing an increase in demand for warehouse space is the supply-chain issues everyone faced last year due to the COVID-19 pandemic and international trade conflicts. A lot of suppliers are increasing the amount of inventory they have on hand, which is referred to as "safety stock," in case of further disruptions in receiving shipments.
U.S. ports will see increased traffic
The classic supply-chain strategy has been pretty simple: Buy stuff from China. Several U.S. suppliers are changing their strategy, though, because of the supply-chain issues faced last year. The new method is known as China Plus One. This means suppliers are moving away from being so reliant on Chinese manufacturers and beginning to source products from other countries as well.
With more shipments coming in from other countries, the cargo traffic will be distributed across a greater number of U.S. ports. While shipments coming directly from China mostly come into ports along the West coast, European countries will typically ship to ports on the East coast and shipments from Central and South America will come into Gulf and Southeast ports.
This shift will create a great demand for industrial space in the Eastern and Gulf ports that will pick up throughout 2021. This is also likely to mean less demand along the West coast, which will have a negative impact on industrial property values and vacancy rates in this area.
Completed developments will increase in number
You’re likely to see a greater number of new industrial properties going into service in 2021 than you would expect. This is largely due to many industrial investors and developers converting vacant retail properties instead of starting new ground-up developments.
Many of these empty retail buildings are ideal locations for companies that are in need of warehouse space right now because of the high demand in several urban cores. This demand is coming from the greater need for last-mile distribution centers to support one- and two-day shipping.
New hot markets will arise
Southern states have already been seeing positive net migration for the past few years, but that has been accelerated due to COVID-19 as people are moving out of densely populated cities at a higher rate, and remote work is allowing more people to choose where they want to live.
This will create a higher demand for warehouse space in states like Texas, Arizona, and Florida. This also means the demand won’t be as strong in the areas these people are moving out of. New York, New Jersey, and Illinois are three states that have seen an uptick in residents leaving, so growth in industrial real estate isn’t likely to be as high in these places.
What does this mean for industrial investors in 2021?
The biggest takeaway from this should be to focus your investments in the areas throughout the country that will have the highest growth in demand. Southern states like Texas and Florida will likely see the greatest overall growth due to the demand from a growing population and the likelihood that the traffic to their ports will increase over the next couple of years.
Industrial REIT investors should pay close attention to where companies are making investments and which properties they’re selling. Any industrial REITs with any of these growth markets already in their pipeline will be worth taking a close look at.