The State of Industrial | Fall 2021

No one was able to predict the ups and downs since the start of the pandemic yet I am always grateful, thinking back to the early days of Covid impacts and restrictions, that many sectors have come out on top after the initial shock was over. One of these sectors that have been absolutely on fire has been industrial.

For years now, industrial has been an area of investment that users and investors proceeded with great caution. With the move of so many former U.S. manufacturers sending production overseas, many regions have been haunted by vacant industrial space sitting for decades now. Although we are not necessarily seeing a manufacturing boom, there is no doubt we are seeing a revolution when it comes to warehousing and meeting the needs of logistics supporting the quickly evolving supply chain demands. The result has been a record low warehouse inventory within the United States which, in return, is driving record-high lease rates and sales prices.

How did we get here?

The pandemic acted as a catalyst to the new reality of retail. Previously, manufacturers focused on keeping adequate stock within a regional distribution center, shipping those goods to retail stores, and direct to consumers. The “lockdowns” associated with the pandemic accelerated the focus on direct-to-consumer shipping and opened both consumers' and suppliers' eyes to the new importance of the timeline from a consumer ordering a product to when it arrives at their doorstep. This evolution highlighted to retailers that competition was no longer about just beating your competitors’ prices on goods, but how quickly you can promise your customer that item will be on their doorstep. This new demand for time-sensitive transactions has shaken the supply chain as we know it and has prompted many companies to rethink their logistics from the ground up.

The elephant in the room

The elephant in the room on this topic is none other than...Amazon. They have led the way in rethinking the reach of their regional distribution centers and have truly carried the torch into the new concept of “last-mile” logistics: the last point of distribution within this supply chain. For a company like Amazon, offering their prime service where most goods can be ordered and on a customer’s doorstep within two days is simply not possible with the old distribution model. Amazon is on pace to absorb nearly 120 million square feet of warehouse space per year as they continue to grow this new model. A large portion of that space will not be million square foot warehouses but instead these smaller last-mile facilities that allow their smaller delivery vans to load up with goods and deliver those goods over a much smaller area reducing the overall delivery times significantly.

So, how big is Goliath?

Did you know of the ten largest industrial projects underway in the United States this year, eight of those are Amazon distribution facilities? We could go on and on for hours about the impressive, and sometimes unbelievable stats, concerning Amazon and its growth. Let's not forget however those consumers are not just shopping via Amazon. Nearly all major retail chains have been forced to redirect a significant amount of their energy into online business and restructuring their fulfillment methods based on these new consumer expectations.

This retail and supply chain revolution has put significant strain on existing warehouses and created a record demand for infill warehouses to meet these last-mile needs. Minimal inventory meeting high demand is resulting in record pricing. Costar notes that on average Amazon has been willing to pay 50-60% above market for locations to meet their last-mile demands. Statistically, other users are having to pony up as well as market rents are up across the U.S. and vacancies have dipped below 5% in many locations.

Should I invest?

All of this action has reinvigorated investors and placed the industrial sector in the spotlight of many REIT’s as well as individual investors. There is no sign of demand slowing, many retailers are still struggling with their current supply chain, and it's clear this will be an expanding category for many years to come. If you are an investor and have not explored investing in such properties feel free to reach out to Broad River Capital to discuss potential opportunities. We would be more than happy to discuss markets and investment approaches we are bullish on whether you are a developer or a hands-off investor. Just be prepared, there are a lot of eyes looking for these opportunities so a successful investor needs to be creative and vigilant in looking for opportunities, of course, that's where Broad River Capital comes in.