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
Industrial CMBS Delinquency Rate & Balance
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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