While there is no shortage of demand for industrial real estate in the United States, supply won’t catch up with that demand any time soon. Though COVID-19 fueled a massive shift toward e-commerce, shoppers are expected to keep buying online once the pandemic subsides. Meanwhile, companies have implemented plans to regionalize supply chains and reshore manufacturing assets to the United States. Other growth drivers for industrial real estate include a rising need for cold storage due to vaccine storage and online grocery fulfillment and a growing need for data centers to support the expanded use of enterprise-level technologies.
OBSTACLES FOR U.S. INDUSTRIAL REAL ESTATE
The low vacancy will undoubtedly extend into 2022 and beyond. Below you’ll find some of the challenges inhibiting developers, investors, and other industry stakeholders as they try to produce enough new supply to meet the current demand.
AGE OF EXISTING INVENTORY
A significant portion of existing industrial real estate has simply gotten old. For example, the average cold storage facility is nearly 35 years old and can’t meet the operational needs of many modern pharmaceutical manufacturers and food distributors. Other industrial verticals have developed similar issues as they attempt to implement advanced automation capabilities, such as lights-out operation and robotics. Additionally, industrial users want greener buildings that fall in line with their internal sustainability initiatives. These needs create significant competition for new inventory between new and existing industrial users.
CONSTRUCTION MATERIAL SCARCITY/COST
While real estate developers have the desire and motivation to build new warehouses and factories, many simply can’t access the resources right now. Nearly 90% of developers have reported construction supply delays and shortages that slow their capacity for new development. Until the supply chain rights itself from the pandemic, this problem will most likely remain ongoing. With projections pushing supply chain disruptions out into 2022—and possibly even longer—CRE stakeholders will continue to face increased costs and material shortfalls for the foreseeable future.
As with most industrial sectors, builders currently face significant challenges with hiring and retaining laborers. The construction sector currently loses employees faster than it can hire them, resulting in a shortage of more than one million construction workers. Understaffing at job sites has a detrimental impact on project timelines, which directly impacts the industry’s ability to deliver new industrial real estate properties quickly. Some industry stakeholders also believe that vaccine mandates may harm hiring and retention for construction firms. As long as logistics and fulfillment, construction, manufacturing, and other industrial verticals continue to compete for a limited pool of talent across the United States, none of these industries will see relief regarding their talent management issues.
NEW COVID-19 VARIANTS
The Delta variant of COVID-19 has significantly slowed recovery in the construction sector. As new variants arise, the global supply chain will react to combat them. Those reactions—such as port and factory closures—will extend the supply chain disruptions that already plague U.S. builders. New cases of more contagious variants at job sites will also result in temporary project shutdowns and delays that the industry can ill afford.
LEVEL OF DEMAND
Even if the stars aligned in every other area, the sheer volume of demand makes it difficult to accommodate the full demand for industrial space quickly. For example, estimates predict that the U.S. will need an additional 1 billion square feet of warehouse space by 2025—no small feat even in the best of times. These estimates also don’t account for increased demand from reshoring manufacturers, data centers, and other industrial users. Until demand begins to ease, it may be exceedingly difficult for developers to close the gap.
ABOUT PHOENIX INVESTORS
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.