Deloitte research highlights various drivers for slowing industrial real estate growth rates

While the e-commerce-driven supply chain has been paced by steady consumer activity, as evidenced with an expected 15% sales growth rate for 2019, research recently issued by Deloitte indicates that industrial real estate growth, for spaces like warehouses, distribution centers, and flex spaces may not keep pace.

The reason for this, explained Deloitte, is the firm’s expectation that market oversupply, heightened competition, rising interest rates and growing cost of capital will send industrial real estate on a downward growth path.

This runs counter to the healthy growth rates in the industrial real estate sector, coupled with a declining availability rate, going back to 2012. That is supported in how the market experienced a net absorption of almost 1.4 billion square-feet from 2014-2018, the report noted.

But it also pointed out that potential shifts in the market may make sustaining momentum more challenging going future, adding that over the next few years, macroeconomic factors, tenant needs, last-mile delivery and rapid technology are likely to reshape demand and warehouse space design.

This becomes more apparent in the form of an industrial real estate demand forecast model from Deloitte’s US Economics Team, which found the following:

• industrial real estate demand is expected to increase by 850 million square feet, to 14.8 billion square feet, by 2023, the rough equivalent of the combined amount of real estate in Atlanta and Salt Lake City;
• double-digit growth in e-commerce sales will drive demand for industrial real estate; and
• rising availability rates and higher cost of capital will lower demand growth, as US economic growth is expected to slow down in 2020

“Potential shifts in the market over the near- to mid-term are a combination of basic supply and demand economics,” explained John D’Angelo, Managing Director with Deloitte Consulting LLP, serving as the U.S. real estate sector leader. “Through our research and modeling, Deloitte is not signaling a long-term decline in demand for industrial RE.  Our analysis does, however, suggest that new supply of industrial RE is catching up with demand that is likely to shrink in the near- to mid-term due to projected economic slowdown and increases in efficiency in occupiers’ use of space.”

While e-commerce sales are a primary reason for companies needing more space, the report observed there are other factors as well, such as needed space for product returns, with customers three times more likely to return products bought online compared to a physical location, and e-commerce companies need 20% more space to manage reverse logistics compared to normal sales. On top of that, the report also noted that with e-commerce sales expected to grow 15% annually and reach 14.8% of retail sales by 2023, product returns will also head up and require more industrial space.

“E-commerce is projected to grow by as much as 15% annually for each of the next five years, and, because on-line shoppers are three times more likely to return items as those who shop in brick and mortar stores, the need for reverse logistics infrastructure to accommodate those returns will mean more demand for space,” said Thomas Boykin, Supply Chain Specialist Leader, Deloitte Consulting LLP. “In fact, some retailers have found that attempting to manage reverse logistics through forward logistics channels can impede customer fulfillment and therefore sales growth.  So, they are beginning to explore establishing separate dedicated channels for reverse logistics, which will mean more demand for warehouse and processing space.”

The ongoing advent of on-demand warehousing players, like Flexe and Flowspace, are aggregating underutilized industrial real estate spaces to fulfill seasonal warehousing needs, according to the report.

Deloitte’s Boykin said that many e-commerce customers are continuing to concentrate within urban areas and to demand faster, cheaper service. 

“Expectations for same-day or even multi-hour delivery are growing fast,” he said. “The challenge of serving these customers within the tight spaces of urban areas within expected delivery windows is driving an increased need for urban fulfillment centers.  Some of these fulfillment centers will be shared across e-tailers, as on-demand warehouses.  And some will be solely owned and operated by some retailers of scale.  In either case, there will be an increased need for space within a small radius of urban areas.”