The start of a new decade is an excellent time to look back and reflect on how real estate markets, industries, and returns have changed over the past 10 years. Seeing what new technologies, businesses, and policies altered the market can help investors gain insight into changes that could come in 2020 and beyond.
As of late, industrial real estate has been one of the top-performing sectors of the commercial real estate (CRE) industry, but a lot has changed over the past decade. Here are five ways industrial real estate has changed from 2010 to 2020.
1. A decade for new demands
The span of years from 2010 to 2015 was a tough time for real estate as the economy tried to recover from the Great Recession. The emergence of e-commerce helped the industrial market not only recover from the financial crisis but thrive, with the greatest increase in demand and returns being seen from 2016 to 2019. According to the U.S. Census Bureau, e-commerce sales as a percent of total quarterly retail sales have nearly tripled since 2010, creating an increased demand for warehouse, distribution, and third-party logistics (3PL) space. This demand will likely continue, especially in the wake of the coronavirus crisis as more people rely on online shopping as an alternative to leaving their homes.
2. Rising returns
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), industrial real estate has grown steadily over the past decade, currently producing the highest return out of any commercial sector for the longest-running consecutive quarters ever with a 10-year return of 12.8% on an unleveraged basis. Annual and quarterly returns have remained relatively even, hovering between 2% and 4%, with peak returns reaching 4.49% in the second quarter of 2011, according to the NCREIF Property Index.
3. Increased occupancy and rental rates
Occupancy and net absorption have increased even as billions of square feet of new industrial space was added in the past 10 years. Since 2016, average asking net rent growth has stayed above 5% according to CBRE Group (NYSE: CBRE), which is a dramatic change from the 2010-2015 average that wavered between -5% and 4%. At the start of the fourth quarter of 2010, occupied space was above 7 billion square feet (BSF), steadily increasing to just over 9 BSF as of the fourth quarter of 2019. Vacancy rates have decreased by nearly half since 2010, according to Jones Lang LaSalle Incorporated (NYSE: JLL)
4. Building designs with e-commerce in mind
Industrial warehouses and distribution centers built in the early 2010s or before aren't having trouble meeting the technological sorting and shipping solutions that e-commerce demands today. Older buildings often have lower ceilings that cannot accommodate modern vertical racking systems and don't have electrical or structural systems to improve cooling and storing of goods. More recently, industrial and warehouse buildings are being built to accommodate new technologies and designed to improve the efficiency and speed of storing and shipping goods.
5. Higher cost per square foot
According to REIS Real Estate Solutions by Moody's Analytics, the cost per square foot for industrial space has consistently risen since 2010, nearing $140 per square foot by 2019. According to Commercial Property Executive, cap rates have gradually declined over the past decade, meaning the cost to purchase industrial space has slowly risen, reaching an average cap rate of 6.31% at the end of 2019. High demand for stabilized industrial properties and increased construction costs have elevated prices for industrial real estate.
This past decade has proven to be an important one for industrial real estate, providing new opportunities for industrial real estate investors to find unmatched returns in the current market. While past performance never guarantees future returns, this sector of commercial real estate is likely to see continued growth. It will be interesting to see how the industry fairs over the next 10 years and what new opportunities, challenges, and innovations adapt and change the industrial real estate sector.