The Changing Landscape in Long-Term Industrial Demand

NEWPORT BEACH, CA, August 9, 2023 – A new paradigm of tenants are contributing to long-term industrial demand from e-commerce, innovation and onshoring, creating exceptional demand, a higher quality of tenant base, and value-creation opportunities, according to a report from BKM Capital Partners.

The report, The New Paradigm: Tenants Driving Industrial Demand points to a significant change to tenancy within the light industrial asset class as three categories emerge: e-commerce, manufacturing, and technology. Collectively, these tenants accounted for roughly a 50% boost in overall light industrial demand.

According to the report, onshoring of large manufacturing plants is providing opportunities for smaller operators to supply goods and support services, while promoting innovation in the local community. This term, called the “halo effect,” takes shape in the form of increased demand for space, which can translate to higher rental rates. These factors can be amplified by other external factors such as infrastructure improvements and economic development initiatives like the 2022 CHIPs Acts.

This new demand, coupled with a constrained supply chain, place the light industrial asset class in a strong position for growth through 2023. The report outlines some of the factors contributing to this strong momentum in E-Commerce, and include:

• Changing Warehousing Expectations: E-Commerce users utilize three times more warehouse space than traditional retailers – occupying smaller warehouses in well-positioned markets.

• Location Optimization: The ability to move products quickly with the shortest delivery times to the consumer is critical to the modern supply chain – increasing the value of lower clear-height product in infill locations.

• Last Mile Advantage: Urban hubs in the e-commerce supply chain shorten last mile distribution, saving not only on delivery cost but also helping meet sustainability goals by potentially saving up to 50% of greenhouse gas emissions. Well-located and highly functional light industrial warehouses or properties reduce transportation costs and meet customer demand.

• New Supply Chain Creations: An efficient supply chain relies on vendor support from light industrial tenants.

• The Halo Effect: Strong e-commerce has been a boom to all supply chain sectors. Every job at big-box warehouses arguably produces three more jobs within a smaller multi-tenant industrial warehouse.

In regard to new technologies and innovations that are reinventing the supply chain, they include:

• Expansion to Smaller Facilities: The warehouse automation market could grow 1.5 times by 2025 to $37.6 billion, Automation solutions, already common in large fulfillment centers (e.g., Amazon, Walmart, Target), will be customized to accommodate smaller buildings.

• Increase in Warehouse Efficiency: Automation will bring savings that can offset the cost of warehouses in urban cores, closer to customers, generating exponential demand for light industrial space.

• 3D Printing Has Been a Game Changer: Rapidly advancing technology has revolutionized traditional manufacturing practices, making them more efficient and cost-effective. 3D printing has enabled companies to operate on a much smaller scale with the same production capabilities as before - producing goods once requiring 500,000 square feet of space is now achievable in only 10,000 square feet.

• On-Demand Production: 3D printing lessens the need for spare parts inventories by enabling the on-demand production of goods from digital files. With 3D printing, you don’t need molds or fixed tooling, allowing mass customization.

• Multi-Tenant Light Industrial in Growing Demand: With less space required for advanced manufacturing, tenants find the multi-tenant light industrial asset more compatible and cost effective for their business needs.

• Flexible Zoning Required: These businesses often locate their office, manufacturing, and warehouse functions within a single unit, all of which are accommodated by light industrial zoning.

The report ends with an examination of how manufacturing responds to supply chain disruption by examining the manufacturing growth spike and the impact of Covid 19 on the supply chain, which created bottlenecks and port jams, forcing manufacturers to reevaluate their offshore production capabilities.

• Large Manufacturers Onshoring: At the risk of further supply chain disruption, private and public sectors continue pursuing domestic manufacturing efforts at a record pace.

• Reshoring is on the Rise: In 2022, U.S. companies reshored almost 350,000 jobs, representing a 25% increase from 2021. In addition, U.S. reshoring in the advanced manufacturing sector has resulted in a significant increase in new manufacturing-plant development, bolstering tenant demand.

• Support Network Utilizes More Industrial Space: Supplying and supporting new manufacturing plants will likely lead to greater demand for mining, manufacturing, warehousing, and distribution space, supporting tenant demand for multi-tenant light industrial space. Growth from this new high-quality tenant base should contribute to secularly higher future rental rates.

“Until about 15 years ago, much of the light industrial tenant base was correlated to the cyclical housing industry. Since then, there has been a significant change in the tenant base with three new industry sectors emerging: e-commerce, manufacturing, and technology. Collectively, these sectors account for an almost 50% boost in overall light industrial demand,” said Chad Horn, CFA, author of the report and a member of BKM’s portfolio management team. “This new demand, stemming from technology innovation and a shifting supply chain, positions light industrial real estate to stay in favor in 2023 and beyond.”