Arguably the hottest sector in commercial real estate (CRE) right now is industrial real estate. Not only has industrial real estate on average outperformed all other real estate sectors for the past five years straight, but demand has surpassed historic levels. It's clear industrial real estate is having a moment, but there are strong signs this "moment" isn't going anywhere anytime soon. Here's why I'm doubling down on this CRE sector.
There's more driving industrial growth than e-commerce
One of the biggest drivers fueling the growth of industrial real estate over the past decade has undoubtedly been the rise of e-commerce. E-commerce, which relies on warehouse, distribution, and logistics warehouses to operate, now makes up around 13.3% of all retail sales, a 129% increase from just 10 years ago. The U.S. Census Bureau recently reported that e-commerce in Q2 2021 alone accounted for $211.7 billion in sales, a number that is likely to continue growing as consumers increase their consumption of online shopping and fulfillment. But there are new drivers in town that are driving demand for industrial space to new levels.
Supply chain issues that originally started after the onset of the pandemic have now become a major problem for industries across the globe. Labor and product shortages are big reasons for the current bottlenecks in the supply chain, but increased transportation costs are also a part of the mix. Transportation costs for shipping containers, one of the most common, and usually affordable, methods for transporting goods globally, have risen around 250% in major ports.
This is causing many U.S.-based operators to start looking for supply solutions closer to home, which directly translates into demand for more industrial space to not just store more products and increase backlog to meet consumer demand but also to manufacture goods.
Industrial sees record-high demand
Prologis (PLD 0.05%), one of the leading global industrial real estate investment trusts (REITs), recently shared a report that provided greater detail into the unprecedented demand industrial real estate is seeing today. Rental growth quarter over quarter was a staggering 7.1%, while vacancy reached a new record low of 3.9%. Industrial real estate REITs and other major players in this industry are trying to meet demand, with Q3 seeing construction starts for industrial space reach an all-time high of 120 million square feet (MSF). Prologis believes the vacancy rate will continue to hover around its current levels, with demand outpacing deliveries well into 2022.
CBRE Group (CBRE -0.56%) also reported similar findings: 2021 leasing transactions for industrial space sized 100,000 square feet or more reached 386 million, a 41.7% increase from 2020 levels. Earlier in 2021, taking rents, which are the executed rental rate according to the lease, exceeded asking rents, which is the marketed lease rate, another indicator that demand has far outpaced supply in most major markets.
Why now is the time to double down on industrial real estate
There are clear long-term drivers supporting the sustained growth of industrial real estate for the near future. Given REITs and industrial stocks are the easiest way to participate in this rapidly expanding sector, that means right now is the time to double down on any industrial stocks or REITs you may own or consider entering trades to buy worthwhile industrial REITs. There will eventually come a time when supply catches up with demand, but for right now, this industry is going nowhere but up.