CSCMP's Supply Chain Quarterly
May 21, 2019
Forward Thinking

Slowing economy spells pause for industrial real estate market

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But savvy developers will pursue inland port opportunities and growing demand for urban fulfillment centers, new research shows.

The industrial real estate market won't escape the effects of a moderating economy in 2019, but savvy developers will focus on new opportunities in urban fulfillment and intermodal logistics, according to year-end research from real estate services firm JLL.

Released December 19, the research forecasts a pause in the industrial real estate market this year due to modestly rising interest rates, a cooling overall economy and the lingering uncertainty businesses are facing over tariffs and global trade tensions.

But there are emerging opportunities for all despite the slowing conditions, according to Chicago-based JLL.

"We're entering the late phase of the business cycle, but even a pause year in 2019 will have a silver lining," Craig Meyer, president of JLL Industrial, Americas, said in a statement announcing the findings. "We have an opportunity to close the gap between demand and supply of industrial property—and that gap is significant. Industrial vacancy is at a record low of 4.8 percent, even as new space comes online quickly."

Meyer said developers, service providers and real-estate occupiers will need to combine knowledge, experience, discipline and "data-driven insight" to succeed in the slowing environment. The JLL research suggests that each group should flex its "street savvy" business muscles in the year ahead, he added.

"While anyone can succeed in a rising tide, only smart operators thrive in a slowing environment with an uncertain outlook ... Being street-savvy is the right strategy for today," Meyer said.

For developers, that means watching demand trends closely while envisioning new kinds of facilities to support last-mile delivery in urban areas. Innovative entrepreneurs will address demand for one-of-a-kind fulfillment and delivery facilities, including multistory urban infill centers that command high rents, Meyer and his colleagues said.

Savvy developers will also pursue intermodal inland port opportunities, as cities such as Phoenix, Denver and Salt Lake City seek to connect by rail to sidestep a shortage of trucking capacity.

"We can expect to see continued growth in intermodal logistics as a critical part of the overall U.S. supply chain to counter traffic congestion, skyrocketing transportation costs and the truck driver shortage," Walter Kemmsies, managing director, economist and chief strategist of JLL's Port, Airport and Global Infrastructure (PAGI) group said. "And, with the re-shoring of manufacturing, enterprising developers will pursue new opportunities for intermodal services and logistics real estate, especially in the automotive and industrial goods sectors."

Savvy occupiers will watch last-mile delivery trends closely as well, the researchers said, viewing total occupancy costs as encompassing not just rents, but also the cost of inventory, transportation and labor for last-mile deliveries. Smart companies will "pinpoint their last-mile delivery strategies around locations where population nodes and density intersect with the optimal demographics for their unique customer base," the researchers said, emphasizing the need to understand how "bricks and clicks" best fit together in today's supply chains.

"Is it better to have a fulfillment center closer to urban areas to avoid transportation costs and potential traffic jams?" said Rich Thompson, international director, supply chain and logistics solutions, JLL. "Or are urban infill locations too costly? Where is labor and at what cost? Access to customers is as important as rent when you're moving large volumes of merchandise. These considerations are driving urban infill logistics decisions."

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