Demand for warehouse space is red-hot right now. The primary driver is an acceleration in e-commerce sales, due in part to the pandemic. With online sales expected to continue growing, the U.S. will need even more warehouse space over the coming years to fulfill all those orders.
That makes now a great time to invest in industrial real estate. Continued demand growth should keep vacancy rates low while driving above-average rental growth rates. That should enable warehouse investments to generate strong returns in the coming years. Here's a look at what's ahead for the sector and how investors can play this megatrend.
Space is at a premium
According to a recent report by CBRE, the U.S. will need to add 330 million square feet of warehouse space dedicated to online fulfillment by 2025 to support the expected rise in e-commerce sales. Driving that estimate is the expectation that e-commerce sales in the U.S. will expand to 26% of total retail sales by 2025.
Globally, that number is even bigger. CBRE estimates that the industry will need another 1.5 billion square feet of warehouse space dedicated to online order fulfillment by 2025, driven by an anticipated $1.5 trillion rise in global e-commerce sales.
Because the industry needs so much new space, vacancy rates for existing locations will likely remain low. As a result, rental rates on legacy industrial properties should continue rising. According to the latest market report from Real Capital Analytics, these rates have been red-hot this year, increasing 9.5% year over year in May. That's making existing properties increasingly more valuable.
How to invest in warehouse space
The U.S. will require a significant amount of capital to build out the warehouse space needed to meet e-commerce demand. The investment requirement has risen this year, given the inflation-related surge in construction costs. Since December alone, the cost of building new warehouse space is up 25%, driven by inflation-related cost pressures on construction materials like steel, wages, and land values. Because the sector now needs even more capital to finance growth, investors should find no shortage of opportunities to put their money to work.
One of the easiest ways to invest in the warehouse boom is through a logistics-focused industrial REIT. Several are investing heavily to build out new warehouse space in the U.S., including Duke Realty (NYSE: DRE) and First Industrial (NYSE: FR).
For example, Duke Realty's current pipeline includes $1.4 billion in warehouse projects across the country. The REIT has already pre-leased 65% of this space, suggesting strong demand. In addition, Duke anticipates starting between $950 million to $1.15 billion of new development projects this year as it continues capturing strong demand. Meanwhile, First Industrial is investing $234.9 million to add more than 2.3 million square feet of additional space.
Investors looking for global exposure could consider industry leader Prologis (NYSE: PLD). The company has an excellent development track record in the U.S. as well as globally. Prologis currently expects to start $2.75 billion to $3.05 billion of developments this year, with 45% of that capital earmarked for U.S. developments and the rest spread across Europe, Japan, China, and the Americas region.
Investors can also make direct investments in industrial real estate, including operating assets and development/redevelopment projects. They can purchase warehouses through a broker or utilize a real estate crowdfunding platform. While most crowdfunding opportunities are only open to accredited investors -- those with a high net worth or salary -- these enable investment into a single asset or small portfolio with a smaller investment than a direct purchase. Further, crowdfunded investments already have property management in place, whereas a direct purchase requires more oversight.
Opportunities abound in industrial real estate
Accelerating e-commerce sales are driving demand for more warehouse space to fulfill orders. That's benefitting investors in industrial real estate via strong rental growth rates and abundant development opportunities. Because of that, the sector should generate strong returns in the coming years, making it one real estate investors won't want to miss.