Thanks to Ecommerce, Industrial Demand Keeps Growing

By Karina Estrella | Trepp

It’s safe to say that ecommerce has transformed not just the retail sector, but the industrial segment as well. According to the U.S. Department of Commerce, ecommerce sales reached about $395 billion in 2016, which is a 15.6% year-over-year increase from 2015. This acute growth in ecommerce has caused retailers to place more emphasis on improving services for last-mile delivery, which is the transportation of goods from a distribution hub to their final destination. 

Last mile fulfillment, for services such as Amazon Prime’s two-hour delivery, is driving demand for smaller buildings and infill sites that are closer to consumers. The industrial sector benefits greatly from increased demand for last mile properties, as ecommerce firms simply need a building in the heart of an urban area, with little regard given to a building’s physical features and quality. Retailers such as Walmart and Target are working to upgrade their hyperlocal presence in order to compete with Amazon.

Demand for industrial space has skyrocketed in recent years due to the rise of ecommerce and its reliance on warehouses and distribution centers. Industrial properties secure about $20.8 billion in private-label CMBS debt, which represents just 4.2% of all non-agency CMBS. Almost 50% of the industrial loan volume is allocated to warehouse and distribution centers, while 32% backs flex/research & development property loans. Manufacturing centers represent 19% of the remaining industrial balance. As more and more companies join the race for delivery and ecommerce dominance, demand for industrial assets can be expected to remain sky high.

Positive industrial loan performance can also be attributed to favorable supply and demand conditions, as demand growth has considerably outpaced supply growth over the past few years. Industrial occupancy rates are also on an upward trend, and are expected to continue rising through the end of 2017, albeit at a decelerated pace due to new supply. Ecommerce, logistics, and distribution needs are the leading motives for leasing activity in new completions. This has driven the vacancy rate to a historic low of 5.2%. Within CMBS, industrial loans posted an even lower average vacancy rate of 4.2% in September.

Average Occupancy – Industrial CMBS

 The industrial CMBS delinquency rate came in at 6.55% in September, compared to the delinquency rate of 5.40% for all private-label US CMBS. While it still outpaces the overall reading, the industrial delinquency rate has dropped nearly 100 basis points from 7.57% in June. Like the broader CMBS reading, the industrial delinquency rate has declined in the past three periods. A total of $1.16 billion in industrial CMBS debt was recorded as 30 or more days delinquent last month.

Industrial CMBS Delinquency Rate & Balance

Looking ahead, robust demand growth in the industrial sector can be expected to continue as more and more retailers are implementing ecommerce platforms and faster delivery services. The segment will benefit from this demand for large distribution centers and warehouses, as well as smaller infill sites to facilitate package delivery. While supply growth spiked in 2016, the amount of completions fell this year, as the collective footprint of those properties coming online totaled about 100 million square feet. This is likely due to a tighter financing environment, higher construction costs, and longer processes for permitting. Should these factors continue to keep supply growth in check, industrial market fundamentals—as well as industrial loan performance—are expected to remain strong.

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The information provided is based on information generally available to the public from sources believed to be reliable. 

Compliments of Trepp, a member of the EACC