For Industrial Sector, 2015 Will Bring Further Resurgence

For Industrial Sector, 2015 Will Bring Further Resurgence

We can finally forget the Great Recession, says Scott Marshall, who manages and leads all aspects of CBRE’s industrial business in the United States, Canada and Latin America. Production, development and rents are up, and on the whole, the sector is poised to continue its resurgence.

Marshall is a member of CBRE’s executive advisory board for its Americas industrial business, totaling over $14.6 billion, and oversees the firm’s global supply chain practice.

NREI: How would you summarize 2014 in terms of the industrial market?

Scott Marshall: Last year helped everyone forget ’07, ’08 and ’09. It’s taken years and years of couch time with psychologists for people to forget how quickly the economy slowed, especially the industrial space, but it feels like we are back at a positive momentum. The user community is seeing growth in their business and contracts. The developer community is seeing rent increases. Our rents were up, nationally, 3.5 percent through the third quarter. So I would be bullish to say we’ll be darn close to that 5 percent rent growth number across the U.S. by the end of the year. The developers are seeing the ability to catch that pro forma that they’d underwritten on buildings.

NREI: What’s the state of industrial as we enter 2015?

Scott Marshall: We look at industrial production numbers. Although manufacturing jobs are down, production levels are up. That’s due to additional automation and robotics in the manufacturing space. We see a resurgence in manufacturing, but it’s with less labor, which you would think is a negative, but we need to see job growth and continue to see the growth in the economy through those jobs and that new hiring. So the manufacturing side is in balance because the production is up, although some of the hiring is down because of the additional mechanization of that space.

NREI: How is e-commerce impacting industrial?

Scott Marshall: It’s hard to talk about industrial without talking about e-commerce. E-commerce has really driven the bulk of our big-box/larger distribution space. It’s a significant portion of big-box absorption—the 500,000-sq.-ft. fulfillment centers—and that’s being driven by this e-commerce growth. We’ve also seen lighter, smaller properties; shrinking availability and rents going up. So there’s a balance [on] both sides of the industrial and distribution spaces. It’s a little bit of both, seeing the same growth. I believe that will continue in 2015. When you look at the e-commerce space, the sales over last Thanksgiving weekend grew by 17 percent in 2013. So not only is the volume up, but the average order size is up.

On Cyber Monday, sales grew by 8.5 percent year-over-year. There was a 20 percent growth in 2012 to 2013, but that was when the e-commerce side of the business was really kicking off. That space is still growing. I think that’s a great indicator that the omni-channel space for retailing is not killing bricks-and-mortar stores, but is actually augmenting bricks-and-mortar. So that’s a trend that I would absolutely see continuing through 2015.

Another trend is next-day or same-day shipping. In the retail space, it’s all about costs and service. If you agree with your client that you’re going to be able to get them their order in an hour or three hours, but in order to do that, your cost model goes completely out of balance, then that’s not good for your bottom line, so the retailers are balancing that cost-per-service measure.

NREI: How is rent growth looking?

Scott Marshall: Rents have grown by 3.5 percent through the third quarter. I believe our numbers were showing in the beginning of the third quarter that we were absorbing space at two times what we were developing in space. So the users were gobbling up square footage at double the volume that we were able to build new space, so that’s good, that’s great for the economy. That means that we are creating a supply-demand imbalance between the two and rents are going to keep going up because there’s a scarcity of space. But that double metric a year ago may have been three to one or four to one, so it’s not that absorption is slowing, but that new construction is going up. So I would say in the short term [in] 2015, and maybe in that first quarter of 2016, we will continue to see that scarcity of space and rents rising, but as new construction picks up and competitive space comes on the market, it’ll balance that rent growth. So I see two trends: one is increase in construction and the other is rent growth.

It almost sounds contradictory, but it’s true that, as rents are rising, people are going to be able to underwrite building new spec product. Those rents are going to continue to rise and construction will continue to go up because it’s going to be able to prove that there’s a need for additional space.

NREI: Any surprises that might be lurking on the horizon this year?

Scott Marshall: I think the surprise is all around what’s going to happen with interest rates. I think the industrial capital market space is healthy right now. I think [market participants] are anticipating some of the potential interest rate fluctuation.

We’re very bullish on 2015. Everything that we’re hearing on the street regarding volumes of deals to sizes of transactions is all positive. Our clients on the occupancy side are seeing a level of sophistication when it comes to site selection or location position that’s never happened before. They’re looking at supply-chain dynamics, they’re looking deep into labor and they’re looking deeply into incentives. So it’s no longer about locating at the corner of Main and First Streets. It’s about, “Where can I find the deepest labor pool today and where can I find it in the future?”

NREI: Any particular markets to watch?

Scott Marshall: If you look at our lowest availability rates throughout the country, you’ve got everything from tier 1 to tier 2 markets. For tier 1, you’ve got San Francisco; Orange County, Calif.; Los Angeles; Oakland—and then Cincinnati. That’s kind of interesting because when you think of “three-color glossy” markets, you wouldn’t think Cincinnati would be on that list. But Cincinnati has a very good dynamic within the supply chain with its space in the Midwest and how goods are transferred across the country.

Markets like Cincinnati are seeing a resurgence, and that’s a positive thing. My overall comment would be this is growth in the industrial logistics economy that is not only touching tier 1 markets. It’s also touching tier 2, and sometimes even tier 3 markets. 

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