The industrial segment looks dramatically different than it did even five short years ago. No longer the “ugly duckling” of commercial real estate, industrial leads the way as changes in technology, supply chain and consumer habits drive demand for industrial property. Industrial is no longer just warehouses and smokestacks. Today, industrial means high-wage, life science research and development jobs. As a result of the increased demand for industrial space, rent growth - which has been on the rise for the past six years - outpaced the three other commercial real estate sectors in 2017. Let’s take a closer look at what is driving industrial demand and the ripple effect it is having locally and beyond.
Drivers of Industrial Demand
The single biggest driver of industrial demand right now is e-commerce. According to the U.S. Census Bureau it accounts for 9.6% of total U.S. sales. Dubbed the Amazon effect, consumer demand for two-day and same-day delivery of goods from online retailers is prompting the development of distribution centers within close proximity to urban populations. As opposed to one large, rural warehouse, leading logistics facility provider GLP’s COO Chuck Sullivan states that “what [online retailers] are actually having to do is acquire a smaller warehouse or multiple smaller warehouses around these major markets.” This is putting a big squeeze on urban industrial space and vacant land.
Advances in technology also directly affect both users and service providers in the industrial segment. Some of these advances include:
Artificial Intelligence: Artificial intelligence is no longer a futuristic concept. AI is here and is greatly impacting the industrial scene. Robots and drones are replacing employees in warehouses, taking over time-consuming tasks such as unloading goods off trucks, scanning barcodes and restocking merchandise. AI increases efficiency while decreasing labor costs, helping to meet the growing demand in the e-commerce arena.
Automation Tools: Automation tools for brokers increases process and paperwork efficiency and allows professionals to focus on engaging with their clients on high-priority matters while relieving them of many mundane and time-consuming tasks.
Smart Building Technology: In a recent Altus report, 35% of the commercial real estate professionals surveyed believe that, in the coming years, Smart building is the technology that will have the greatest impact on industrial.
Good News for Capital Markets
Because of the nationwide boom within the industrial segment of commercial real estate, JLL reports that as of December 2017, local and international investor interest was up a startling 34.7%, reflecting investor confidence that industrial is still on the upswing. Because industrial capitalization rates are higher in the Twin Cities than most large coastal cities, local industrial is attracting a substantial number of both local and international investors.
A new trend that could impact industrial real estate is the entry of mixed-use development. In Vancouver, BC, the Strathcona Village project is a successful example of industrial, manufacturing, office, residential and retail space all in one development. This mixed-use space creates living wage jobs and greatly enhances the tax base while facilitating the coveted live-work-play lifestyle that an increasing number of 21st century residents and employees are seeking.
As mixed-use developments increase, it will be interesting to see how Towerside Innovation District, at the heart of St. Paul and Minneapolis, will respond. Herein lies an opportunity to innovate like Strathcona Village but with the added perks of innovative, district-wide systems and infrastructure. The opportunity for 21st century industrial product close to the urban core is an opportunity for industrial jobs in a live-work-place environment right in our own backyard.
Telling the story of the change in industrial is evidenced by the shift from “industrial parks” to the term “business centers.” We see this name change in St. Paul Port Authority developments, an agency our founder holds in high regard for their-forward thinking mindset. This economic development engine has been the catalyst for areas of industrial redevelopment throughout the east metro. Industrial space in business centers is in increasing demand. The vacancy rate for Twin Cities industrial space in the first quarter of 2018 was 4.5%, down from 8% in 2010. Space is tight and many industrial spaces are turning over quickly as one business moves out and another moves in on its heels. Industrial businesses are also renovating and moving into older industrial buildings due to the space shortage.
Because of the squeeze on available industrial space, many companies are making a decision to build to suit. Construction for a large industrial build to suit recently began on land originally slated as a retail center in the city of Maple Grove. Cottage Grove is another Twin Cities community that is breaking ground and paving the way for build to suit industrial space with packaging manufacturer North Star Sheets expected to move into its new building next month.
In response to consumer habits and their heavy demand on e-commerce, distribution centers such as Amazon in Shakopee will continue to expand within the industrial market and many others will likely put down urban roots with distribution centers close to the Twin Cities population centers.
This is an exciting time to be a part of the industrial segment of the commercial real estate scene. If you would like to learn more about the state of industrial in the Twin Cities, we would be happy to connect with you. Just email us at email@example.com.