Prices at the Pump – Do They Impact Industrial Real Estate Demand?

The short answer is yes, they impact the momentum of activity surrounding industrial property, particularly by logistics firms.   Driving the demand for warehouse/distribution space, specifically big box, 30’ and greater clear height product, is the need to accommodate movement of goods where costs associated are as reduced as possible.  For transport, this means a tighter distribution network of facilities (less distance between hubs) and storage of larger inventories to service rising eCommerce activity, shifts in population/demographics, and import/export growth.  ECommerce is especially impacted by higher fuel costs as consumers drive less to shop and order online.  According to the US Census Bureau, this trend has been accelerating over the past decade and more so since 2010 as consumers reach for their mobile devices to place orders.  It’s predicted that online and catalog sales using mobile devices will reach 72% by 2015.  These dynamics start at the manufacturing level, and in the U.S., higher fuel prices spur greater domestic manufacturing of goods, keeping costs of goods competitive with the expenses associated with imports.  And to offset any hits to their profits, U.S. manufacturers are moving closer to their customer bases, another level of demand for industrial real estate.  Additionally, by the close of March 2013, the Purchasing Manufacturers Index for the U.S. was 51.3, lower than the previous month but still indicating expansion in this sector.

Of the top industries reported to be the most active in leasing and the absorption of warehouse/distribution space since the recession (2009 – 2012), approximately 49% were related to retail, transport/logistics, and wholesale trade firms.  Total absorption of existing supply reached 182 million square feet over the course of the past three years, rivaling pre-recessionary demand.  Companies have been seeking quality structures providing more efficient use of space through better technological features, causing a flurry of new construction activity to commence to meet the need.  In addition to speculative development on the rise, firms are also opting to build their own facilities to optimize their structural efficiencies and requirements.  By year end 2012, industrial completions jumped by 96% over the 2011 total with 58.0 million square feet completed, 58% of which were build to suit completions for tenants.  Current development levels, however, are still well below the building of the early to mid 2000’s, keeping supply levels in check.  But at the current absorption of space across U.S. markets, industrial users will continue to find limited blocks of space on the market as availabilities continue to dwindle.
All industrial RE market indicators point to continued positive momentum in 2013, with major U.S. industrial markets either at stages of equilibrium or getting close.  For logistics firms, good news remain at the pump where, according to the U.S. Energy Information Administration, by April prices had dipped slightly, from $3.77/gallon in March to 3.64/gallon, and are still lower then this time in 2012 by $0.32/gallon.

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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