Situs RERC Insights into Real Estate Sectors – September 2017

The industrial market hit a new height in 2016 with strong performance all around, and the positive trajectory is expected to remain in the near future. More people ordering online might mean fewer people shopping in physical stores, but it also means that more space is needed for storage and distribution centers, and there’s no reason to believe this will change any time soon. With decreasing vacancy and solid rent growth, the industrial market is stronger than ever. Supply lags in most of the regions, particularly in urban infill locations.

Among the regions, the West is expected to see an overall increase in manufacturing and distribution workers, which will lead to greater demand for space. The trend is declining in the Midwest, increasing in the South, and somewhat mixed in the East.

The main driver behind the strong returns is the healthy mix of appreciation and income return.  The West region in particular has seen appreciation return outperforming income return, which is a rare sight given the recent weak appreciation performance in other sectors.

Retail Decline Also Continues

The continuing rise in e-commerce is placing a great deal of pressure on the traditional retail market. Many major stores are continuing to close across the country and demand for brick-and-mortar space is decreasing. In some sense, this may signal both the winding down of retail and the ascendancy of e-commerce as the new retail market leader.

The two important drivers for the retail industry are personal income and employment, which have been inching up in recent years and making the retail market a bit less prone to a large downward spiral. With strong fundamentals, the income returns are expected to remain solid in the foreseeable future. Given the expected strong rent and employment growth, the appreciation returns will be somewhat steady, albeit downward trending, in the near future and reverting to long-term averages in a few years.

If retailers want to survive in this brutal environment, they have to offer their customers something more than a run-of-the-mill shopping experience. Consumers want to be entertained, because if they’re just looking for a pair of socks they can order them online. But while retailers and brands may come and go, the buildings still remain. If a retail space is located in an easily accessible location, with top-rate amenities, new tenants will move in.

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