Industrial Market Insights: 4 Key Global Trends Shaping the Future

In this article, you'll explore:

• The impact of reduced market volatility on logistics and storage demands.
• How the rise of e-commerce is transforming warehouse space needs.
• The increasing focus on supply chain resilience and onshoring.
• The effects of declining industrial building deliveries on market dynamics.

Sweeping global forces are reshaping the country’s logistics landscape, and their influence reaches far beyond the warehouse walls.

From a seismic shift in market volatility to the relentless rise of e-commerce, each trend is altering the game for businesses. And if that wasn’t enough, the focus on supply chain resilience in a post-pandemic world and the unexpected consequences of fewer industrial building deliveries are putting incredible pressure on commercial tenants to keep up.

Succeeding in commercial real estate’s most competitive sector, warehouse and logistics space, demands an acute understanding of trend evolution and management. So, as we prepare for the final quarter of 2023 and beyond, the following four influences will leave the most notable marks on the industrial market. Subscribe to stay on top of these (and many more) CRE trends. 

1. A Fall in Volatility

Now more than ever economic activity is now tied up in logistics. And the decline in volatility is significantly influencing the industrial market, primarily driven by the imperative need for logistics space.

This shift is prompted by various key factors. Firstly, businesses are proactively optimizing their inventory management to safeguard against supply chain disruptions, resulting in the accumulation of surplus inventory and an increased demand for storage space.

Heightened awareness of supply chain resilience, accentuated by recent global disruptions, has compelled businesses to diversify their supply chain networks, leading to greater demand for logistics infrastructure.

Secondly, the growing diversity of consumer preferences and the desire to cater to specific market segments necessitate expanded product varieties, further driving the demand for additional storage.

Thirdly, shifting demographics, including urbanization and population growth, are directing a larger portion of consumer spending toward goods, thereby increasing the need for storage and processing facilities. Additionally, the dominance of e-commerce over traditional retail is a transformative force.

All said and done each unit of growth now needs 20% more additional logistics than needed before the pandemic.

2. A Shifting Retail Landscape

The transformation of the retail landscape is undeniably one of the most significant trends impacting the industrial real estate market. As online sales continue to surge, they are fundamentally reshaping the way we think about logistics and warehousing.

Accommodating E-commerce necessitates extensive logistics space. Why? Because the supply chain for online shopping involves multiple stages: storage, sorting, packaging, and distribution. In fact, experts estimate that fulfilling online orders can require up to three times the amount of space compared to traditional retail setups.

E-commerce companies maintain larger inventories to ensure products are readily available for online shoppers. This demand for storage space means that industrial warehouses need to accommodate more goods than ever before, further driving the need for additional square footage.

Not only this but strategically located properties are skyrocketing in demand to meet the ever-expanding requirements of e-commerce and its vital last-mile deliveries. Delivery timeline expectations are consistently falling and companies need to keep up to remain competitive.

So, the warehouse footprint in a corporate portfolio is rising to keep up with new standards.

3. Supply Chain Resilience

Supply chain resilience has become a dominant trend reshaping the industrial real estate landscape. The pandemic revealed the risks associated with overly streamlined supply chains, leading to inflationary pressures and economic disruptions.

To address this, companies are reassessing their supply chain strategies. One key approach involves establishing duplicate facilities to diversify sourcing, ensuring a steady flow of goods during disruptions.

Not only this, but Prologis estimated that transportation is the most significant supply chain cost, comprising roughly 50 percent of the tenant’s logistics cost. And in context, real estate makes up just 5 percent of the total logistics costs. So going forward, industrial manufacturers and professionals in general are hyper-focused on supply chain considerations.

Additionally, the trend of onshoring, or bringing manufacturing closer to domestic markets, is gaining traction to enhance supply chain resilience. While companies once embraced offshore manufacturing and just-in-time deliveries, recent years have revealed the flaws in this approach. The need for a more integrated and resilient model has become apparent, emphasizing the importance of proximity and responsive supply chains.

Onshoring offers an improved supply chain resilience, reduced shipping costs, faster turnaround times, better quality control, and the ability to tap into local talent and innovation. It also quells the uncertainty of navigating trade in a time of political unrest and how it influences the price of key features like fuel.

Both strategies demand increased industrial real estate, including warehouses, manufacturing facilities, and distribution centers. As businesses adapt to these imperatives, the industrial sector experiences rising demand for strategically located properties supporting supply chain resilience.

4. Contraction of Industrial Deliveries 

The industrial real estate market is experiencing a significant impact due to the contraction of industrial building deliveries. Presently, there is a substantial 620.5 million square feet of warehouse space under construction nationwide. The completion of nearly 90% of these ongoing construction projects by year-end was initially expected to meet the demand for industrial space, potentially leading to stabilized rent growth.

However, several factors are influencing this dynamic. Elevated replacement costs and the unavailability of affordable financing are discouraging developers from investing in speculative developments.

Consequently, as the newly developed warehouse space is absorbed by the market, rent growth is anticipated to slow significantly in response to the increased supply. This cycle is likely to persist until developers regain confidence and initiate new construction when demand catches up once again.

In essence, the contraction in industrial building deliveries is reshaping the industrial market by dampening rent growth and tightening vacancy rates. Developers are adopting a cautious approach in the current economic climate, and this restraint is influencing the balance between supply and demand in the industrial sector.

Tenants should seize this opportunity to secure favorable deals and optimize their logistics operations. Because 2024 may have an entirely new leasing environment in store for tenants since new construction is slowing significantly.

Takeaways for Industrial and Logistics Tenants

It is critical for tenants to stay on top of trends that are influencing their industry. Not only can you capitalize on pockets of growth, but you can understand how your existing portfolio is positioned for success.

By adapting to technological advancements, embracing sustainability initiatives, and leveraging the expanding e-commerce landscape, tenants can optimize their operations and maximize their competitive advantage. 

To stay on top of the evolving demand for warehouse space, corporate tenants need to become aware of the factors that influence their position. Watch our free video course to get insight on what to do when touring your next warehouse space!