IllinoisIndustrial Industrial and logistics outlook for 2019 Matt Baker December 20, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email The country’s industrial and logistics (I&L) sector performed extremely well throughout 2018, impelled by strong market fundamentals, growth in consumer spending, business inventories and industrial production. According to CBRE’s 2019 U.S. Real Estate Market Outlook, investors, developers and users can expect more of the same in 2019. For global institutional investors, I&L was the preferred asset class for the second year in a row. Just like the year previous, demand for logistics space in 2018 outpaced supply, with net absorption exceeding completions and a historically low vacancy rate bottoming out at 4.3 percent in the third quarter. What’s more, retail and logistics continue to integrate, as e-tailers seek out physical outlets and traditional, brick-and-mortar vendors not only strengthen their online channels but restructure warehouse footprints in response to or anticipation of the ensuing online sales. Since 2013, users have absorbed an annual average of between 75 to 90 million square feet of I&L space, largely due to the growth of e-commerce. The CBRE report indicates that there is no reason to believe that this trend will abate next year. “These structural factors that have supported I&L expansion during this cycle should continue in 2019 with robust occupier demand,” the CBRE report’s authors wrote. “However, low vacancy and restrained new construction will limit available logistics space options for occupiers, thus tempering absorption gains and pushing up net asking rents.” Consumers drive trends in 2019 According to the CBRE report, there is a growing shift toward multistory warehouse development in the U.S. As consumers expect ever-faster deliveries, logisticians vie for every last square foot of last-mile space. This has led to a doubling of land prices for single-story warehouse developments over the past five years to $30 per buildable square foot. Last mile fundamentals are markedly better than big box facilities over the same time, with availability dropping 27 percent and rents rising by 20 percent. As the Chicago market still has an abundance of greenfield space, it remains to be seen if the demand for last mile availability will lead to vertical industrial developments. Though there are multistory logistics developments in the New York, Seattle and San Francisco pipelines, there are currently no such plans for any here. One trend to watch that certainly will impact the Chicago metro is a need for more cold storage. Again catering to consumer preferences for convenience and speed, grocers are making aggressive shifts toward e-commerce. While we may no longer be “hog-butcher to the world,” the Chicago market still sees an outsized amount of food passing through its distribution channels. There are currently 3.6 billion cubic feet of industrial food commodity cold storage space in the country, with an additional 2 billion cubic feet of retail cold storage. Online grocery sales now represent a mere 3 percent of grocery sales, but that number is expected to jump to 13 percent by 2024—which will drive the need for more cold storage space. Finally, the I&L sector is expected to move more toward modernized, automated facilities. Consumer demand for speedy deliveries, combined with rising labor costs, will lead to more efficiencies in the logistics arena. According to Bain Macro Trends Group, enhanced automation will result in a 46 percent increase in worker productivity for the transportation and warehousing industry in the next decade. This will undoubtedly have major implications for I&L labor markets and their supply chains for years to come. A trade war brews One contentious issue remains, however: the current international trade environment. According to CBRE econometric advisors, a $1 increase in imports consumes three times as much warehouse space as a $1 increase in exports. In the near term, it appears likely that low unemployment, a strong dollar and robust consumer confidence will keep imports from tapering off. Ahead of a 10 percent tariff on $200 billion in Chinese goods entering the U.S. that took effect in September, August containerized imports increased 4.8 percent year-over-year. This third quarter surge of imports increased inventory carrying costs and put stress on logistics operators as labor is in short supply and wages are increasing. But the tariffs come at time of strong economic performance in the U.S. and of world trade on the upswing, in terms of value. There is a high correlation between I&L demand and economic growth; as GDP currently stands at a strong 3.5 percent, the year ahead looks good for industrial and logistics.