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  • Forbes Real Estate Council

Not Just E-Commerce: How Manufacturing Will Drive The Industrial Property Boom

E-commerce has dominated the headlines as the driver of an industrial property boom and bounteous rent growth. According to Los Angeles-based CBRE, the average industrial lease rate of $7.01 per square foot in the first quarter was not only the highest rate achieved since the brokerage began tracking the metric in 1989, but it also represented a year-over-year increase of 5.9%, which was well above the 12-month average of growth rate of 3.8% going back to the fourth quarter of 2011.

But in no way is e-commerce the only force generating the good times. Traditional warehouse users and third-party logistics companies have also been active in the market, and now manufacturers could be poised to contribute a bigger share to that growth, too.

According to the latest economic forecast from the MAPI Foundation, an organization that researches and showcases manufacturing's impact on the economy, U.S. manufacturing output is on schedule to regain all of its losses by early next year since output bottomed in June 2009. In fact, citing the U.S. tax cuts and a continuing economic rebound in much of the world, the organization projected that U.S. industrial production would grow an average of 2.8% annually through 2021. It’s a much more optimistic outlook versus last fall, when the MAPI Foundation's predicted average annual growth of 1.5% for the period.

Certainly potential trade wars have introduced a measure of trepidation about the future. But Morningstar suggests that spats over tariffs were unlikely to drag down the economy while predicting that the “road ahead is flashing green for the manufacturing economy,” according to The Engine of Industrial Manufacturing Runs on Oil, a report issued on April 10. That’s particularly true amid the fourth industrial revolution, which is injecting a host of life-changing technologies into the everyday routine.

At a recent event in Kansas City, Missouri, for example, James Tobin, chief marketing officer for global auto supplier Magna International, projected that car makers will produce 109 million automobiles by 2024, up from about 95 million last year. He also noted that the $1 trillion auto supply industry has become one of the most high tech as car makers incorporate more motion sensors, cameras and autonomous safety features such as automatic braking systems.

That's good news for communities like the Kansas City area, which is home to Ford Motor Co. and General Motors plants. Magna International, which opened a body assembly plant in nearby Liberty in 2012, expanded the operation in 2015. Faurecia, a global automotive technology company based in France, plans to build a new $60 million interiors production facility in the suburb of Blue Springs.

Other communities are seeing the benefits of the broader manufacturing resurgence first hand, too:

  • In Bardstown, Kentucky, Japan-based Takigawa Corp. recently broke ground on a $46 million high-impact packaging manufacturing plant.

  • Tempe, Arizona-based First Solar in April announced plans to build a new $400 million solar module manufacturing facility in Lake Township, Ohio.

  • Taiwanese electronics maker Foxconn is nearing ground breaking on its planned $10 billion technology plant in Mount Pleasant, Wisconsin.

  • In April, Cleveland-Cliffs broke ground on a new $700 million hot briquetted iron production plant in Toledo, Ohio.

  • Big River Steel is contemplating a $1.5 billion facility expansion at an existing manufacturing plant in its home state of Arkansas or at the Port of Brownsville in Texas.

As those and other expansions ramp up, vendors to the manufacturers will drive demand for additional industrial space. Heretofore, many of those users have been renting smaller, older buildings that online retailers avoid, but the alternatives are dwindling, said David Egan, global head of industrial and logistics research for CBRE. While some 244.5 million square feet of industrial space is under construction–a year-over-year increase of 3.7%–the sector’s availability rate fell 20 basis points to 7.3% in the first quarter this year from a year earlier. That rate measures all vacant space and occupied space for sublease available for lease.

"E-commerce has been an important factor for the industrial property expansion, but it’s still only about a third of demand in the marketplace," Egan said. There’s not a lot of new supply coming in for the non e-commerce users, but there’s a lot of demand. So we’ll either see demand slow down, which I don’t think is going to happen in the near term, or developers are going to have to pick up the pace.

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