Commercial Real Estate News / Insight / The Rise of Industrial Real Estate: Understanding the Market Boom and How to Profit

The Rise of Industrial Real Estate: Understanding the Market Boom and How to Profit

Published: 06-11-24 Category: Insight

Luke Williams

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The inside of a large industrial warehouse.

While other sectors of commercial real estate (CRE) have seen plenty of challenges, the industrial sector has been on a roll for several years.

The Census Bureau's report for April 2024 reported that construction spending had reached $224 billion annually, which dwarfed previous years' numbers.

While several drivers are affecting industrial CRE, the rising need for properties that can house logistics-driven modernization and the steadily growing popularity of e-commerce are fueling growth.

Various companies are competing to be logistics leaders. This requires improvements across the board, from lower costs to smarter inventory control and smart storage and warehousing.
The growth of e-commerce continues as consumers decide to continue online shopping after the end of pandemic quarantines. Trends such as meal delivery and subscription services continue to become more popular.

More recently, logistics warehouse demand for e-commerce slowed but is being replaced by new demand from the onshoring of manufacturing as more businesses bring their production needs home.

Making the Right Investor Moves

With the current demand rapidly absorbing new supplies of industrial properties, the sector is considered to be in a healthy place. However, not all locations are equally well-equipped, and supply and demand are still patchy in some areas.

This means that CRE investors who are considering purchasing industrial property will need to conduct comprehensive research to locate cities where industrial CRE is at a premium.

This article includes data to help both new and seasoned CRE investors understand the current state of industrial properties.

To begin, we'll look at the various factors driving demand.

Current Demand Drivers for Industrial Properties

As the national and global economies continue to overcome the challenge of a global pandemic, CRE analysts have identified five drivers for today's industrial investment and leasing market.

Technological Advancements. The integration of automation, robotics, and artificial intelligence in warehousing operations has intensified the need for high-tech facilities.
E-commerce Expansion. The rapid growth of online shopping fueled the need for development of efficient distribution networks. This led to a surge in demand for warehouses and fulfillment centers.
Supply Chain Optimization. Companies continue to study their supply chains for ways to reduce costs while creating ways to offer reliable delivery times. This was most easily accomplished by moving goods through strategically located warehouses and distribution hubs.
Last-Mile Delivery. While the retail giant Amazon helped encourage demand for same-day or next-day delivery, smaller competitors require their own distribution centers to help them manage this complex service.
Inventory Management. The shift towards agile inventory management, combined with the need for buffer stocks to mitigate supply chain disruptions, has increased many retailers' requirements for storage space.

Although this is not a complete list of factors, CRE investors who familiarize themselves with these will be able to locate investment opportunities confidently.

Here are methods and strategies used by seasoned CRE investors, including those prepared to renovate existing properties and develop new ones.

Creating Industrial Properties for Higher Investment Returns

In a perfect world, industrial CRE investors would be able to locate properties that fit their business plan, budget, and demographics in just a few minutes.

However, commercial real estate has rarely offered lucrative rewards for minimum effort and know-how.

Instead, investors will be better prepared if they review the following options with any business partners before proceeding.

Acquiring and renovating existing industrial properties to meet modern warehousing standards can provide attractive investment opportunities, particularly in markets with limited land availability.

This option can pay off particularly well for a property located in a city or region popular with your prospective tenants.

Developing a specialized warehouse, storage hub or distribution center that caters to a specific industry is another option. Examples include specialized cold storage for pharmaceuticals and high-security facilities for valuable goods. Serving a popular niche can be especially lucrative.

Choosing to develop within a multi-modal logistics park with easy access to rail, road, and/or air transportation can attract businesses that demand efficient supply chain solutions and/or transportation of goods.

Certain states, such as Illinois, Texas, Michigan, and California, are home to areas that are ideal for the multi-modal business model.

Depending on your approach, you may be prepared to shop in a location with a past track record of successful industrial CRE transactions. Here is data to help you locate an ideal location.

States and Cities With Active Industrial Markets

Acquiring and developing a land parcel in a strategic location, such as near major transportation hubs and/or busy urban centers, can offer significant returns for investors who are prepared for this type of project.

Choosing the right location requires specialized research and due diligence. Investors who are still in the planning stages of land development may want to take a closer look at these cities with considerable industrial investment:

Southern California's Inland Empire proved its resilience in the earlier days of the pandemic, with industrial sales during 2021 covering 15 million square feet across 85 properties.

Los Angeles racked up transaction volume that approached $2.8 billion during 2023 that covered 11.2 million square feet across 112 properties. While average sales prices for industrial properties fell slightly in 2023, it still marked a 39% increase from prices recorded for 2021.

New Jersey's industrial CRE market was active during 2023, with 83 properties changing hands and generating a combined value of $1.8 billion.

Phoenix's real estate landscape was affected by movements within neighboring California markets, and industrial sales surpassed $1.5 billion as of October 2023.

This represented relatively stable industrial asset pricing compared to 2022 and 2021 pricing.