The recent entry to the North American logistics and industrial property market by Australian commercial real estate investor and developer, Goodman Group, is the latest news to underscore the resiliency and opportunities in U.S. industrial property market, according to the Industrial and Logistics group at Jones Lang LaSalle.
Goodman Group expects to invest $1.5 billion in the sector across North America, mainly in new developments, through an exclusive agreement with Irvine-based Birtcher Development. Jones Lang LaSalle, which acted as strategic advisor on the Goodman-Birtcher agreement, views the influx of foreign capital to the U.S. industrial market as one of the key trends driving the resurgence of the sector. “Jones Lang LaSalle has done an excellent job in collaborating with us to help create our national land strategy. The firm’s senior and regional management have assisted our efforts to secure and underwrite prime development sites in our targeted markets,” said Brandon Birtcher, CEO of North America for Goodman Birtcher.
Low U.S. interest rates, positive economic indicators and an increasing demand for prime, well-located logistics property are some of the other elements bringing focus to U.S. industrial assets such as warehouses and distribution centers, according to Tim O’Rourke, Executive Vice President at Jones Lang LaSalle.
Other factors such as the revival of the U.S. manufacturing sector, the trend toward on-shoring manufacturing back to the U.S., and the demand for big box distribution space by the thriving e-commerce sector, are driving developers and investors toward U.S. industrial real estate, according to Rich Thompson, Managing Director of Jones Lang LaSalle’s Supply Chain & Logistics Solutions consulting practice.
“Compared with other product types, industrial properties are less capital intensive, have not historically experienced the highs and lows in rental rates and values, and remain a stable and predictable asset class,” said Mike Fowler, Executive Vice President at Jones Lang LaSalle. “The evolution of global economics and the global supply chain are transforming the U.S. industrial real estate landscape, and attracting the attention of some major global players.”
The top five themes driving the industrial real estate resurgence:
1). Strong supply and demand characteristics
The industrial real estate sector currently benefits from stable, healthy demand and an increasingly constrained supply of high quality space. The national vacancy rate has slowly declined from its 2010 peak to reach 9.1 percent, a level last seen in 2009. Given a rather nominal, but still steady, amount of positive net occupancy, it has fallen by 90 basis points from the first quarter of 2011, when the figure was at 10 percent. Now it is moving toward pre-recession levels of 7.5 percent.
Demand has maintained a stable trajectory, marked by eight consecutive quarters of positive net absorption, but at 25.3 million square feet (s.f.) in the first quarter, it remains well below pre-recession levels. However, a spike in demand for ‘big-box’ distribution and logistics space (>400,000 s.f.), has re-introduced speculative development in key hub markets where vacancy has decreased significantly. While in the meantime, a renewed confidence from corporations has triggered a meaningful flow of build-to-suit activity. Vacancy in the big box market is running at less than 3 percent in a number of the major logistics markets in the U.S. Strong demand over the last two years has nearly burned off all existing Class A product in these locations.
2). Foreign capital seizing the moment
The U.S. industrial investment market is ripe for growth. Since the recession in 2009, when annual industrial sales volume plummeted to just $10.9 billion, the pace of industrial investment sales increased to $35.1 billion in 2011. Overall sales volume for 2012 will likely be in the $40 to $45 billion range. Market activity is expected to be extremely strong in the second and third quarters, with limited new product coming to market in the fourth quarter as the election approaches.
Goodman Birtcher is poised to capitalize on this trend, employing a development-led investment strategy that will focus initially on the development of prime facilities in key logistics hubs, with the ability to invest in stabilized properties over time. The venture will focus on the West Coast logistics hubs of Los Angeles, San Francisco and Seattle, and East Coast markets including New York, New Jersey and Central Pennsylvania.
“With favorable market conditions, increasing demand and a lack of large facilities in A+ locations, the time was right for Goodman Group to move into the U.S. industrial real estate market,” said O’Rourke. “This is a sure sign of confidence in the sector and we expect to see more investment interest both domestically and abroad.”
3). Global supply chain trends
Growing labor costs in Asia, particularly China, coupled with volatile fuel costs, have forced companies to re-evaluate their supply chain networks. “The U.S. is a huge consumer market. All things being equal, companies will want to be in close proximity to their customers as it improves speed-to-market, reduces inventory carrying and freight costs as well as reduces risks and improves customer service,” said Thompson. “These critical supply chain considerations make the U.S. increasingly more attractive from a manufacturing or sourcing perspective. Companies are diversifying their manufacturing and sourcing decisions just as an investor would their personal investment portfolio. Having a physical presence in the U.S. is becoming increasingly important.”
4). The explosion of E-commerce in the U.S. and globally
If all demand for big-box space is tied to multi-channel retailers or ‘e-tailers’. The influx of e-commerce and m-commerce (mobile) has revolutionized the retail sector. Retailers tapping multiple channels to sell their merchandise are finding it more cost-effective to increase online logistics operations rather than open more traditional stores, requiring an entirely different distribution model. Therefore, retailers are evolving their regional distribution networks to include e-commerce distribution centers. Demand from these companies has been growing since 2009 and will continue to do so.
“Our focus on distribution hubs such as Southern California and Central Pennsylvania is in a large part driven by the demand in this sector,” said Shannon Hondl, Chief Development Officer for Goodman Birtcher. “Jones Lang LaSalle’s expertise in this industry vertical coupled with their ability to underwrite and execute complex and strategic projects has helped put us in a market-leading position as we develop the next generation of distribution centers.”
5). Solid U.S. connectivity and infrastructure
The U.S. has a world-class supply chain infrastructure (e.g. ports, highways, airports, rail) which is another important factor in attracting and retaining manufacturers. Its proximity to the Panama Canal which is currently undergoing an expansion so that large ships can pass through its waters is another plus for the U.S. The expansion will encourage growth and investment within the broader logistics universe impacting everything from shipping and rail line construction to warehousing and terminal development in the U.S. and around the world.
The Canal expansion is prompting companies in both seaport and inland markets to re-examine their logistics processes and facility positioning. The demand for industrial property around these receiving ports both inland and coastal, is set to rise as U.S. ports gear up to cater to the next generation of large shipping vessels. Federal funding for necessary dredging and pier-side infrastructure has not been readily available. This has created opportunity for the private sector to offer new solutions through public-private partnerships (P3’s) in order to bring port expansion projects to fruition
“We are seeing increased interest in ‘Inland ports’ (intermodal distribution centers located inland), connected directly to major seaports,” said Thompson. “With pressure mounting on our nation’s seaports and high demand for port warehouse space, moving goods directly by rail to inland ports becomes increasingly attractive. The growing utilization of intermodal transportation will help companies reduce costs and create new opportunities for developers and investors in the industrial real estate sector.”
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47.2 billion of assets under management. For further information, please visit www.joneslanglasalle.com.