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  • Institutional Real Estate, Inc. | By Denise Moose

The Ever-Changing Industrial Sector

A look at the latest trends in Industrial Real Estate

Featuring Brian Malliet, CEO and Founder, BKM Capital Partners

An industrial building
Pecos Commerce Center | Mesa, AZ

The logistics industry is changing and transforming at a rapid rate, and the pace of change is only expected to accelerate in the coming years. To stay ahead of these changes, investors and managers need to be aware of logistics trends that are shaping logistics in the year ahead.


One of those trends to watch is a possible economic slowdown affecting the sector. A recent report from JLL, “Industrial Outlook: Industrial and logistics sectors feel the squeeze amid headwinds, Q3 2023,” states industrial fundamentals showed increasing signs of slowing in the third quarter as the turbulent macroeconomic environment persists. And, although there is still demand from industrial tenants, many users either have pressed pause on executing new deals or are taking much longer to finalize deals as they evaluate all possible outcomes. Furthermore, real estate decisions are being reviewed by more people within the company, going as far up as the C-suite in some cases, adding to the prolonged timeline. Those with upcoming renewals in markets that have seen tremendous rental rate growth are weighing the options of moving locations to a more cost-effective market.


Rapid changes and potential slowdowns are yet more issues for developers facing challenges and growing pains.


“One of the biggest challenges facing industrial developers today is the political and social pushback for building big-box warehouses near residential areas,” says Brian Malliet, CEO and founder at BKM Capital Partners. “We’ve seen this happening in several markets across the country. For instance, when someone buys an office campus and rezones it for warehouse/distribution centers, we see a lot of objections. Many complain about the increased commercial traffic, or the rezoning would be detrimental to the local economy since it would bring down employment levels.”


Malliet continues to add there is already a distinct lack of space in most markets, and the unavailability of debt and high development costs have cut down speculative development by half. While upcoming industrial deliveries will open a brief tenant-favorable window this year and next, the subsequent slowdown in development will once again squeeze supply and demand because ecommerce will only continue to grow. The supply-demand imbalance is going to be exacerbated again in late 2024.


“Additionally, demand has normalized, and ecommerce sales growth has returned to its pre-pandemic norms, but the lasting impact of supply-chain disruptions has increased the desire for more control,” says Malliet. “This will translate to a need for more W&D space, yet the type of space won’t be one-size-fits-all or concentrated in just a few markets.”


Technological Advacements

Digitization is another trend transforming the logistics industry, with companies adopting new technologies to streamline their operations and improve customer experiences, according to an article from CriticaLog, “6 major logistics trends shaping logistics management in 2023.” This includes the use of cloud-based platforms, as well as mobile apps to manage logistics operations more efficiently.


To achieve digital transformation, logistics companies need to invest in advanced technologies and develop digital strategies that align with their business objectives. This can involve partnering with technology vendors, hiring skilled IT professionals and training employees to use new technologies effectively.


As logistics companies continue to embrace digital transformation, they will be able to improve their customer experiences, reduce their costs and gain a competitive edge in the market.


Malliet agrees and explains, in terms of logistics, the pandemic shed light on the need for supply-chain agility, to better track and control the process, costs, time and inventory — companies have embraced technology to improve efficiency and controls.


“The logistics industry generates vast amounts of data, which needs to be managed, utilized and stored,” says Malliet. “Robust data analytics and management systems are needed to help companies gain insights, make decisions and improve operations. Yet technology integration — IoT, AI, blockchain, robotics — can be costly and requires modern, updated facilities.”


In addition, technologies that increase the productivity of logistics facilities, such as automated storage and retrieval systems, keep attracting investment. The continued evolution of these technologies and the emergence of new ones like drones and autonomous vehicles will probably lead to more efficient and responsive supply chains and greater productivity for industrial assets.


“For industrial developers and their tenants, the challenges of customer proximity and land constraints demand solutions,” says Malliet. “For this reason, among others, it’s important for industrial developers to invest in advanced technologies and ensure their facilities can meet the end users’ technological needs.”


New Trends Affect Fundamentals

Knowing what trends are current or coming up is always an advantage when it comes to investing. The same report by JLL states the nearshoring trend will remain one to watch for the long term, while ecommerce will fuel the need for last-mile facilities.


Although absorption will likely remain positive through the end of 2023, it will largely be attributed to the delivery of preleased assets, according to JLL. Rental rate growth is expected to remain positive, but it is anticipated to be less robust than the unprecedented growth witnessed over the past two years. Though industrial is predicted to remain a landlord-favorable sector through 2024, some geographies might soften as certain indicators moderate. As companies nearshore their operations, some companies have adjusted their distribution strategies by using ports on the Gulf of Mexico and the East Coast — such as New Jersey; Savannah, Ga.; and Charleston, S.C. — which affected West Coast port volumes slightly.


To meet the demands of sustained ecommerce growth and same-day/next-day delivery expectations, there will be an increased need for urban logistics facilities located closer to major population centers. These last-mile facilities bring inventory closer to consumers, which reduces delivery times and transportation costs. At the same time, occupiers strive to achieve sustainability goals by implementing initiatives such as using a fleet of electric vehicles for deliveries or adding solar panels to unused rooftop space to offset any negative carbon footprint. Technology and automation activities are expected to advance significantly in the coming years, which will provide industrial users with increased opportunities for growth.


Malliet backs these trends up by stating that several trends are converging to shift and reconfigure the logistics landscape in the United States, in terms of the type of space going up, and in which markets.


“The type of space being built will have to change,” says Malliet. “The importance of last-mile locations has boosted the need for infill industrial, but those sites are hard to find and expensive to develop, necessitating bigger projects to justify the costs. As such, much of the logistics space that has been developed in past several years has been large footprints of 100,000 square feet or more.”


Furthermore, he explains, the increased need for manufacturing facilities is further squeezing the availability of smaller industrial assets. As manufacturing heats up, given that some manufacturers are shifting facilities back to the United States as part of the onshoring and nearshoring trends, it may reduce the demand for the types of large distribution centers that have been dominating development of late. The lack of available land and development costs will also require the reuse of existing, underutilized, older assets, particularly for small-bay logistics.


“We’re also seeing a slight shift started in the geographic hubs,” explains Malliet. “Combination of supply chain problems and issues at U.S. ports — namely, Los Angeles and Long Beach — led to a shift away from traditional logistics hubs, opening more markets as viable areas for logistics. Nearshoring also will give an advantage to logistics hubs in proximity to both the Mexican border and U.S. customers to enable cross-border transportation. Transportation executives anticipate 20 percent of Asia-originating freight will move to closer-proximity markets by 2025, doubling to 40 percent of freight originations by 2030. In addition, foreign direct investment in Mexico rose 41 percent year-over-year through the first half of 2023, with U.S. accounting for almost half. And as more factories open in the Midwest and U.S. South, they will need logistics services to store and distribute those goods.”


Going Forward

A recent article from Forbes, “Six trends for shipping and logistics globally in 2024, and beyond,” states logistics will be shaped by six key trends in 2024 and beyond. Those trends are digitization, economic headwinds, sustainability, last-mile delivery, supply-chain resilience and cybersecurity.


Malliet explains there is going to be a continuing downward pressure on facility sizes in the logistics side of the equation because of the evolution of advanced manufacturing machines and 3D printing.


“Technology also ties into alternative delivery methods driven by customers’ desire for speedy deliveries,” says Malliet. “This may drive a rise in the use of autonomous robots and drones to speed delivery and strategically positioned micro-fulfillment centers near urban areas.”


He further explains that crowdsourced delivery platforms — aka collaborative logistics — that tap into local resources are also rising as part of the effort to meet customer expectations and improve efficiency and sustainability.


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Click here to view the entire iREOC Connect December publication.

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