By Laura Calugar
E-commerce hit brick-and-mortar stores heavily and, at the same time, boosted the industrial sector. According to Amherst Capital Management’s 2018 Market Outlook, strong warehouse demand coming from e-commerce tenants is most likely to exceed supply this year. As expected, construction is picking up, with metros such as Chicago and Atlanta leading the way.
Commercial Property Executive reached out to Amherst Capital Management’s Abbe Franchot, managing director & head of originations, and Christopher Kelly, managing director & head of commercial real estate lending, for insight on the hottest industrial markets and factors shaping the sector going forward.
How is the industrial sector performing?
Franchot: While retail brick-and-mortar stores have been experiencing pressures with the growth of e-commerce, industrial commercial real estate performance continues to be strong.
Kelly: We believe the industrial sector has benefited particularly from growing warehouse and last-mile demand, and as a result, supply is also gaining momentum. We expect, over the near term, that the significant demand from e-commerce tenants should exceed supply.
What kind of industrial assets are most sought-after?
Kelly: Amid the well-documented struggles of the overall retail industry, the continued growth of e-commerce market share has led to a substantial increase in warehouse demand, contributing to the industrial sector’s recent track record as one of commercial real estate’s hottest sectors. We expect continued growth in industrial warehouse and logistics properties as online retailers expand their distribution hubs and last-mile centers.
Where is tenant demand strongest?
Franchot: Amherst Capital’s data shows that tenant demand is especially strong in Chicago, Dallas and Atlanta, for example. We’re seeing a sizable amount of new industrial and warehouse construction in those markets. Other strong markets include Columbus, Ohio, Phoenix and the New York City metropolitan area. While supply is increasing, demand for warehouse and last-mile facilities should be able to absorb increasing supply in the near term.
Are developers targeting secondary markets or are primary markets still their first choice?
Franchot: A mix of both primary and secondary markets is driving growth. Our data shows that areas outside of large cities, such as Southern California’s Inland Empire and the distant suburbs of New York/New Jersey are benefiting from strong demand from last-mile deliveries.
Kelly: Certain Southeastern markets, such as Charleston, S.C., Savanna, Ga., and Jacksonville, Fla., are also demonstrating strength due to the economic activity from local ports and an increasing number of companies growing or relocating to the region.
Amherst Capital recently provided a senior loan for the purchase and renovation of a one million square-foot mixed-use industrial campus in Charleston largely because of the facility’s proximity to five port terminals and the market’s strong manufacturing base and affordable prices. The strength in industrial and warehouse properties is widespread and we expect it will continue.
Are multi-story warehouses a solution to the increasing demand from e-commerce tenants?
Franchot: Multi-story warehouses may be a viable solution to meet the increasing demand from e-commerce tenants and we are seeing demand for multi-story facilities pick up. This approach could provide more square feet and greater flexibility for warehouse tenants, as this increased density could help relieve congestion in areas of dense population or construction, such as New York City.
What will influence the industrial market in the near term?
Kelly: Supply is picking up in response to sustained demand, solid rent performance and decreasing vacancy rates, as well as an economy that continues to grow at a moderate pace. We expect these trends to continue. In addition, we expect that the recent tax cut could help increase rents and speed up growth across commercial real estate more broadly, including in industrial and warehouse properties.
Images courtesy of Amherst Capital Management