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Real Estate Journal — Mid-Year Review — June 23 - July 13, 2017 — 7C
M id A tlantic
I ndustrial
By Matt Sargent, Bentall Kennedy (U.S.) Limited Partnership Infill Industrial offers sustainable growth opportunities
I
ndustrial property funda- mentals are strong—both nationally and in the Mid-
of at least 28 feet and other modern building features—ac- count for less than 8 percent of national industrial inventory, but vacancies in the subset rose from 7.8 percent in 2013 to 11.2 percent in the first quarter of 2017 due to new product in lease-up. Demand for these properties is substantial, but vacancies could remain el- evated with more than 220 million square feet of property under construction or recently completed—double the pace of year ago. Infill Industrial: the key to the ‘last mile’
Infill industrial demand is healthy around large Mid- Atlantic cities with steady job growth and other posi- tive economic factors. Our investment strategy focuses on markets with sustainable long-term growth prospects, and that extends to the indus- trial markets serving those areas. For example, our recent acquisitions and developments in the Mid-Atlantic region include distribution buildings that serve the New York and Philadelphia markets, as well as a cold storage facility in the Maryland market that serves
Washington, D.C. ‘Last mile’ delivery and increased expec- tations for quick response to e-commerce orders have made it essential for companies to locate their inventory as close to customers as possible—and that means infill locations. Distribution buildings in these markets have benefit- ted from direct-to-consumer delivery and the need for dis- tributors to be close to large, growing population centers. Consumer trends have also increased demand for cold stor- age space near urban markets. As people eat more fresh foods
and dine at restaurants more often, the need for infill cold storage space is increasing, and the national vacancy rate on these specialized facilities is lower than the overall indus- trial vacancy rate. Cold storage facilities of- fer two additional benefits to investors: Stable vacancies resulting from the relatively inelastic demand for food; and limited speculative supply, given the high cost of construct- ing these facilities. However, functionality of a building’s layout and efficiency of its continued on page 20C
Atlantic re- gion. Growth i s pa r t i cu - larly robust in infill mar- kets, where distribution centers can serve nearby vibrant ur-
Matt Sargent
ban live-work-play markets. It’s in these locations where sustainable growth is expected to remain the strongest should a downturn occur. While a downturn is pos- sible, the current outlook is the real estate equivalent of 70 degrees and sunny. Various sources tracking the national industrial market indicate that vacancy in the asset class is as low as it has been since at least the early 2000’s. As a result of the tight market, net operating income (NOI) growth and investment returns have been stronger in the industrial sector than in any other major property type, whether you look back one year, three years or five years. Demand growth is driven heavily by extensive retooling in supply chains due to the rapid expansion of ecommerce. Amazon and third party lo- gistics firms are leasing infill spaces in submarkets tra- ditionally reserved for light industrial uses, in order to bol- ster their “last-mile” capabili- ties, enabling same-day deliv- ery of online purchases inmany communities. To compete, traditional brick-and-mortar retailers have invested heav- ily in omnichannel marketing strategies that erase the lines between website and in-store purchases. This shift in retail patterns has fueled net absorp- tion in modern industrial prop- erties and older properties on well-located infill sites. Bulk distribution markets with convenient access to the nation’s ports, highway and rail infrastructure—includ- ing Northern New Jersey and Baltimore—have fared well. But construction activity bears watching. New supply contin- ues to accelerate in these mar- kets, making them vulnerable in the event of slower demand growth. Modern distribution build- i ngs—tho s e l arge r than 200,000 sf and completed in 2000 or later with clear heights
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