Chicago—July 24, 2012— Australian commercial real estate investor and developer Goodman Group’s recent entry to the North American logistics and industrial property market is the latest news to underscore the resiliency and opportunities in U.S. industrial property market, according to Jones Lang LaSalle’s industrial and logistics group.
Goodman Group expects to invest $1.5 billion in the sector across North America in new developments through an exclusive agreement with Irvine, Calif.-based Birtcher Development. Jones Lang LaSalle, which acted as strategic advisor on the Goodman-Birtcher agreement, views the influx of foreign capital to the U.S. industrial market as one of the key trends driving the resurgence of the sector.
“Jones Lang LaSalle has done an excellent job in collaborating with us to help create our national land strategy,” said Brandon Birtcher, Chief Executive Officer, North America for Goodman Birtcher. “The firm’s senior and regional management have assisted our efforts to secure and underwrite prime development sites in our targeted markets.”
Low U.S. interest rates, positive economic indicators and an increasing demand for prime, well-located logistics property are some of the other elements that bring focus to U.S. industrial assets such as warehouses and distribution centers, according to Tim O’Rourke, Executive Vice President, Jones Lang LaSalle.
Other factors such as the revival of the U.S. manufacturing sector, the trend toward on-shoring manufacturing back to the U.S. and the demand for big-box distribution space by the e-commerce sector are driving developers and investors toward U.S. industrial real estate, according to Rich Thompson, Managing Director, Supply Chain & Logistics Solutions, Jones Lang LaSalle.
“Compared with other product types, industrial properties are less capital intensive, have not historically experienced the highs and lows in rental rates and values and remain a stable and predictable asset class,” said Mike Fowler, Executive Vice President, Jones Lang LaSalle. “The evolution of global economics and the global supply chain are transforming the U.S. industrial real estate landscape, and attracting the attention of some major global players.”
The top five themes driving the industrial real estate resurgence include:
Strong supply and demand characteristics—The industrial real estate sector currently benefits from stable, healthy demand and an increasingly constrained supply of high quality space. The national vacancy rate slowly declined from its 2010 peak to reach 9.1 percent, a level last seen in 2009. Given a rather nominal, but still steady, amount of positive net occupancy, it fell by 90 basis points from the first quarter of 2011, when the figure was at 10 percent. Now it is moving toward pre-recession levels of 7.5 percent. Demand has maintained a stable trajectory, marked by eight consecutive quarters of positive net absorption, but at 25.3 million square feet in the first quarter, it remains well below pre-recession levels. However, a spike in demand for ‘big-box’ distribution and logistics space (greater than 400,000 square feet) re-introduced speculative development in key hub markets where vacancy has decreased significantly. While in the meantime, a renewed confidence from corporations has triggered a meaningful flow of build-to-suit activity. Vacancy in the big box market is running at less than 3 percent in a number of the major logistics markets in the U.S. Strong demand over the last two years nearly burned off all existing Class A product in these locations.
Foreign capital seizing the moment—The U.S. industrial investment market is ripe for growth. Since the recession in 2009, when annual industrial sales volume plummeted to just $10.9 billion, the pace of industrial investment sales increased to $35.1 billion in 2011. Overall sales volume for 2012 will likely be in the $40 billion to $45 billion range. Market activity is expected to be extremely strong in the second and third quarters, with limited new product coming to market in the fourth quarter as the election approaches. Goodman Birtcher is poised to capitalize on this trend, employing a development-led investment strategy that will focus initially on the development of prime facilities in key logistics hubs, with the ability to invest in stabilized properties over time. The venture will focus on the West Coast logistics hubs of Los Angeles, San Francisco and Seattle, and East Coast markets including New York, New Jersey and Central Pennsylvania.
“With favorable market conditions, increasing demand and a lack of large facilities in A+ locations, the time was right for Goodman Group to move into the U.S. industrial real estate market,” said O’Rourke. “This is a sure sign of confidence in the sector and we expect to see more investment interest both domestically and abroad.”
Global supply chain trends—Growing labor costs in Asia, particularly China, coupled with volatile fuel costs, have forced companies to re-evaluate their supply chain networks. “The U.S. is a huge consumer market,” said Thompson. “All things being equal, companies will want to be in close proximity to their customers as it improves speed-to-market, reduces inventory carrying and freight costs as well as reduces risks and improves customer service. These critical supply chain considerations make the U.S. increasingly more attractive from a manufacturing or sourcing perspective. Companies are diversifying their manufacturing and sourcing decisions just as an investor would their personal investment portfolio. Having a physical presence in the U.S. is becoming increasingly important.”
The explosion of e-commerce in the U.S. and globally—The primary industries leading the demand for warehouse and distribution space are food-and-beverage, e-commerce and traditional retailers. In fact, one-third of all demand for big-box space is tied to multi-channel retailers or ‘e-tailers’. The influx of e-commerce and m-commerce (mobile) revolutionized the retail sector. Retailers tapping multiple channels to sell their merchandise are finding it more cost-effective to increase online logistics operations rather than open more traditional stores, requiring an entirely different distribution model. Therefore, retailers are evolving their regional distribution networks to include e-commerce distribution centers. Demand from these companies has been growing since 2009 and will continue to do so.
“Our focus on distribution hubs such as Southern California and Central Pennsylvania is in a large part driven by the demand in this sector,” said Shannon Hondl, Chief Development Officer for Goodman Birtcher. “Jones Lang LaSalle’s expertise in this industry vertical coupled with their ability to underwrite and execute complex and strategic projects has helped put us in a market-leading position as we develop the next generation of distribution centers.”
Solid U.S. connectivity and infrastructure—The U.S. has a world-class supply chain infrastructure (e.g. ports, highways, airports, rail) which is another important factor in attracting and retaining manufacturers. Its proximity to the Panama Canal which is currently undergoing an expansion so that large ships can pass through its waters is another plus for the U.S. The expansion will encourage growth and investment within the broader logistics universe impacting everything from shipping and rail line construction to warehousing and terminal development in the U.S. and around the world. The Canal expansion is prompting companies in both seaport and inland markets to re-examine their logistics processes and facility positioning. The demand for industrial property around these receiving ports both inland and coastal, is set to rise as U.S. ports gear up to cater to the next generation of large shipping vessels. Federal funding for necessary dredging and pier-side infrastructure has not been readily available. This has created opportunity for the private sector to offer new solutions through public-private partnerships (P3’s) in order to bring port expansion projects to fruition.
“We are seeing increased interest in ‘Inland ports’ (intermodal distribution centers located inland), connected directly to major seaports,” said Thompson. “With pressure mounting on our nation’s seaports and high demand for port warehouse space, moving goods directly by rail to inland ports becomes increasingly attractive. The growing utilization of intermodal transportation will help companies reduce costs and create new opportunities for developers and investors in the industrial real estate sector.”