The industrial real estate sector has consistently been one of the top-performing real estate sectors over the past few years, however, the confluence of economic challenges, persistent marketplace fluctuations, and uncertainties experienced in 2023 led to a slowdown in industrial investment. Is this investment deceleration indicative of a broader trend, or can we anticipate a resurgence in industrial sales activity in 2024?
To answer that question requires a deeper understanding of the wide array of factors that impact industrial real estate markets, understanding investors’ concerns, and recognizing how these insights ultimately can shape perspectives and influence market activity.
Jim Koman, founder, ElmTree Funds
(Photo courtesy of ElmTree Funds.)
Resilient demand drivers
Positive news for the industrial real estate sector continues as the underlying fundamentals that have upheld resilience in this sector persist and show little signs of abating. Notably, the continuous expansion of e-commerce growth remains one of the primary demand drivers shaping the industrial real estate landscape. Projections suggest annual e-commerce sales to increase 8-9% over the next five years, which we believe signals robust potential for future growth.
On the supply side, there is also reason for optimism. With growing numbers of companies looking to diversify and de-risk their supply chain, reshoring, nearshoring, and friend-shoring are all on the rise. Deglobalization, with more production, transportation, and logistics infrastructure moving back either state-side or in nearby locations like Mexico and Central and South America, presents opportunity for the U.S. industrial real estate market.
Markets across the country are primed to capitalize on these trends, particularly in border states such as New Mexico, Arizona, and Texas. Furthermore, as part of the ongoing supply chain diversification and risk mitigation efforts, numerous corporations are inclined towards decentralizing their U.S. entry points, which should yield increased investment opportunities for investors.
A third factor fueling optimism among investors is the upward trend in U.S. manufacturing, notably in semiconductor and electric vehicle (EV) production. Over the past two years alone, this sector has seen significant growth, expanding by $320 billion.
What goes down, must come up?
Though providing exact economic predictions is difficult, both analysts and economists agree that the long-feared recessionary cycle may not materialize. Supported by strong economic data and optimism about the likelihood of interest rates coming down slightly in 2024—alongside the possibility of further decreases in 2025—the structural economic strain experienced throughout 2023 appears to be easing.
Cyclical trends related to industrial inventory also present pockets of opportunity for developers and investors. Given the substantial influx of newly constructed industrial assets in recent years, the slowdown in construction starts observed last year was imminent. However, the current landscape has shifted. The industrial real estate sector steadily absorbed inventory over the past several years and appears poised for a significant increase in new developments in the second half of 2024. Developers and investors who are well-positioned and well-capitalized stand to be the primary beneficiaries.
Optimism and opportunities
It isn’t solely the border states referenced above that are poised to gain from these positive industrial trends. Approximately 60% of manufacturing mandates are expected to occur in the sunbelt markets, including but not limited to South Carolina, North Carolina, Florida, Texas, Alabama, Georgia, and Arizona, and represent 40% of total U.S. tenant industrial real estate requirements.
As e-commerce continues to expand and the economic outlook becomes more optimistic, coupled with favorable indicators spanning from supply chain diversification to U.S. manufacturing infrastructure and volume, it is not surprising to witness a notable shift in investor sentiment towards the industrial real estate sector. Institutional investors are increasingly more active, with private real estate target allocations holding at an average of around 10.8% — a positive sign indicating that real estate investment appetite remains healthy. The primary focus will continue to be on investment opportunities in markets that exhibit resilient fundamentals, including growing labor forces, strong demographics, and strategic access to major U.S. distribution arteries.
Keys to success
While the industrial marketplace—and, consequently, industrial transaction volumes—seem to be moving in a positive direction for 2024, the basic formula for sustained success has not changed: mission-critical industrial real estate investments in primary and secondary markets that are net-leased to investment-grade tenants on a long-term basis remain the gold standard.
The lasting appeal of mission-critical industrial assets stems from their essential function not only for Fortune 100 companies but also for the broader economy. These assets fulfill crucial production, logistics, and fulfillment needs and are bolstered by promising trends and demand drivers, which present future growth opportunities. For developers and investors who operate in this space, these underlying fundamentals combined with evolving market dynamics, suggest ongoing strong performance and investment appetite for industrial real estate in 2024 and beyond.
Jim Koman is founder and chief executive officer of St. Louis-based ElmTree Funds.