The Least-Hyped CRE Sector

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“Skate to where the puck is going. Not where it has been.”

-Wayne Gretzky

Some of the greatest athletes in team sports in the world can see a play in their heads before it happens.

This ability to anticipate has given all-time great athletes like Wayne Gretzky, Michael Jordan, and Tom Brady a distinct edge over their competitors – allowing them to win multiple championships in their respective sports and to achieve legendary status.

The ability of these athletes to anticipate how the various pieces within a game are going to move around allows them to adjust on the fly – allowing them to always be one step ahead of their competition.

They make it look easy but achieving that level of awareness and success didn’t come easy for any of these legends. All three athletes were intense students of the game – all notorious for their intense film study for evaluating their rivals.

These athletes put themselves in the best positions to win every single time. They weren’t in the right place at the right time or put the ball or puck where they needed to be because of luck, it was because they did their homework beforehand to be more prepared to analyze and process everything in front of them as the game developed.

Anticipation in CRE Investing

In commercial real estate (“CRE”) investing, what sets the great investors apart from the run-of-the-mill investors is the ability to anticipate “where the puck is going” and “not where it has been.” There is one particular CRE segment that has our interest that hasn’t exactly received the hype from investors like other sectors like multifamily, self-storage, and senior living.

This particular CRE sector has quietly been growing in the background and is poised to explode in the coming years.

Which CRE sector has our attention?

Industrial real estate is where the puck is going to be. I believe this least-hyped CRE sector is poised for significant potential growth and there are numbers to back it up.

A recent Deloitte Insights report highlighted the recent growth in the industrial sector. Over the past five years, the industrial real estate sector – warehouses, distribution centers, flex spaces, and other industrial buildings with storage facilities – has experienced healthy growth while some other real estate sectors have struggled to sustain demand.

Since 2012, year-over-year (YOY) rent growth has been positive and the availability rate has continued to decline. From 2014 to 2018, the industrial real estate market experienced net absorption of nearly 1.4 billion square feet.

This growth in the industrial sectors was before COVID-19 hit our shores. The nationwide lockdowns have spurred further growth.

The industrial sector was the direct beneficiary of the shift away from physical retail to e-commerce. Despite the economic downturn, in Q2 and Q3, the industrial sector experienced low vacancy rates, record-high asking rents, and positive net absorption.

The boom in e-commerce led to an increase in the demand for warehouse and distribution space. Along with the boom in e-commerce came a newfound desire by companies to rely less on China in the supply chain and to keep more inventory on hand to guard against supply chain disruptions.

CBRE’s Q3 Report on the industrial and logistics sectors highlighted the following figures for Q3:

  1. An increase in demand for online shopping led consumer goods companies to add more distribution space.
  1. Q3 marked the 42nd consecutive quarter of positive net absorption (56.8 million sq. ft), pushing the year-to-date total to 119.9 million sq. ft. This is the 10th consecutive year that net absorption has surpassed the 100 million-sq.-ft. mark.
  1. Strategically located distribution centers are increasingly important for the success of retailers. The availability of such space remains tight, with a relatively low vacancy rate of 4.7%.
  1. Tight market conditions have caused pricing to continue to increase. Triple-net asking rents averaged $8.09 per sq. ft. in Q3 – up 6.4% year-over-year and the highest they’ve been since Q1 2019.

Key Takeaway

The key takeaway from both the Deloitte and CBRE reports on the industrial sector is that demand is rising while supply remains stagnant leading to falling vacancies and rising rents.

Aren’t those ideal market conditions?

Fortune favors those who anticipate impending trends and who are bold enough to act on that anticipation. We are confident in the industrial sector because e-commerce along with other industries will adjust to a new normal where shopping, learning, work, and entertainment will increasingly all become more mobile.

We expect to capitalize on these trends by acquiring and providing the space and infrastructure needed by companies to support their e-commerce activities.

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