7 Reasons to Invest in Industrial Real Estate This Year

Out of the varying asset classes available to invest within the commercial real estate industry, industrial real estate -- which includes storage bays, manufacturing buildings, and warehouses, in addition to logistics and distribution centers -- is one of the leading performers. Investors on the hunt for new opportunities to diversify their portfolio into real estate, or branch into new high-growth real estate sectors, should look into industrial real estate in 2022. Read on for seven reasons why.

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The National Association of Real Estate Investment Trusts (NAREIT) tracks the historical performance of publicly traded real estate investment trusts (REITs), including returns by sector. Industrial real estate is the second-highest-performing sector of REITs on an annualized average for the past 26 years, only outpaced by self-storage.

On an individual basis, eight of the largest and most popular industrial REITs outperformed the S&P 500 over the past 10 years. As of late 2021, industrial real estate produced a 45.75% return, and 2022 is shaping up to be another monster year for this industry.

Product and labor shortages related to the ongoing pandemic have resulted in major supply chain issues across the globe. Coupled with today's high inflation, the costs for goods are on the rise, which has incentivized manufacturers to find more localized solutions to their supply chain.

This inadvertently created new demand for industrial space in the United States, particularly last-mile facilities, which are the last step in the distribution process before a product is delivered to its end user.

E-commerce is one of the biggest reasons industrial real estate has experienced such robust growth over the past decade. In the third quarter of 2011, e-commerce sales made up 4.6% of all retail sales. Just 10 years later, in Q3 2021, e-commerce sales made up 13% of all retail sales, an 8% jump.

And it appears this is just getting started. As the pandemic continues to wage on, consumers will likely shift their buying presence to online, especially as cost and speed of delivery for products continue to improve.

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Manufacturing in the U.S. is on the rise. November 2021 marked the 18th consecutive month of growth for the manufacturing sector, according to the Institute for Supply Management. Increased orders and product shortages mean manufacturers are working double time to increase production to build a more sustainable backlog while maintaining current demand.

When coupled with the number of other factors mentioned previously, it's understandable that more space is needed as manufacturing grows.

Q3 2021 marked a record-breaking 448.9 million square feet of industrial space under construction. Most would worry that unparalleled development would put the industry at risk for oversupply, but demand is keeping pacing with deliveries. The national vacancy rate for industrial space is at 4.3%, a record low and a testament to vigorous demand.

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In 2021, ocean freight transportation costs increased over 200%, while domestic freight costs creeped up 40%, according to Drewry Supply Chain Advisors and Cass Freight Index. Transportation costs are expected to ease some in 2022, but considering transportation costs make up around 40% to 70% of a manufacturer's costs, the higher the cost, even at a marginal rate, the more pressure there is to find more cost-effective solutions closer to home.

REITs are the most accessible and affordable way for investors to participate in this growing sector. According to NAREIT, there are 13 different industrial REITs to choose from, each specializing in its own industrial property types and markets.

Prologis (NYSE: PLD) is one of the largest REITs by market capitalization, and by far the most popular industrial REIT in the market today, but there are several other high-quality REITs in this sector to invest in.

Historically speaking, industrial real estate is a strong performer. But given the other drivers the industry is seeing today, it's clear why investors should have their eye on industrial real estate in 2022. This year should be an excellent time to jump into the industrial market, choosing to invest in one or several of the high-quality industrial REITs that are available.

Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Prologis. The Motley Fool has a disclosure policy.