Driven by a massive shift in consumer behavior, global supply chain needs, and evolving logistics demands, industrial properties have demonstrated resilience, growth, and high returns. Here’s why industrial real estate is outclassing the market and why it’s likely to continue on this trajectory.
A Top Performer in Transaction Volume
In 2013, industrial real estate accounted for only about 10% of U.S. transaction volume. Fast forward to 2023, and this figure has climbed to over 27%, making industrial real estate the second-most active asset class, right behind multifamily properties. This growth is a clear indicator of how investor preferences have evolved, particularly in the face of significant challenges in the retail and office sectors. In fact, industrial real estate surpassed both retail and office investments in 2019 and hasn’t looked back, as it continues to attract substantial capital.
The rise of e-commerce, along with the need for efficient logistics and distribution centers, has driven demand for industrial spaces, especially in high-demand areas close to urban centers. This demand is reflected in higher property values and a growing appetite among investors for industrial assets, particularly large-scale logistics portfolios.
Source: Avison Young
Increased Investor Demand and Allocation
The appeal of industrial real estate is evident in open-ended core fund (ODCE) allocations, where it has captured 28% of total investments as of early 2024. Global investors, from private equity firms to institutional investors, are drawn to industrial real estate for its resilience, consistent returns, and diverse uses, from warehousing to last-mile logistics. As the office sector faces declining fundamentals, with values dropping from 38% of total transaction volume in 2015 to just 17% in 2024, industrial properties have captured market share, benefiting from the shift in investor allocation.
This increased interest has created downward pressure on cap rates for industrial properties, especially in prime locations. Cap rate compression signals that investors are willing to accept lower returns in exchange for the stability and growth potential industrial assets offer. As cap rates decline, property values rise, enhancing the overall appeal of industrial investments and creating further opportunities for growth.
The Factors Driving Industrial Real Estate’s Success
Several factors contribute to the ongoing success and high demand for industrial real estate:
The E-Commerce Boom: The expansion of online shopping has fueled demand for warehousing and distribution centers, particularly for last-mile logistics facilities near urban centers. Consumers now expect rapid delivery, and companies are investing in strategically located industrial properties to meet this demand. Industrial assets that support efficient fulfillment operations, particularly those close to large consumer bases, have become invaluable.
Global Supply Chain Resilience: The pandemic exposed vulnerabilities in global supply chains, prompting companies to diversify and strengthen their logistics networks. Industrial properties play a crucial role in supporting these networks, particularly large-scale logistics centers that serve as hubs for goods distribution. Investors recognize that industrial real estate is essential to this infrastructure and therefore offers long-term stability.
Attractive Income and Lower Operating Costs: Industrial leases are often structured as triple-net leases, where tenants cover property maintenance, insurance, and taxes. This lease structure provides a reliable income stream for property owners, lowering their exposure to operating costs. Additionally, industrial properties generally require fewer tenant improvements than office or retail spaces, resulting in lower capital expenditures and higher net income for investors.
A Shift in Capital Allocation
In the past decade, we’ve seen a marked shift in capital allocation toward industrial real estate and away from office assets. Office properties, once the backbone of commercial real estate, have seen a dramatic decline in demand due to remote work trends, resulting in a reduction in their market share. Office allocation has decreased from 38% in 2015 to a mere 17% in 2024, a 21% reduction that highlights the sector’s challenges.
In contrast, industrial real estate has enjoyed steady growth as an alternative investment, particularly as demand for logistics space intensifies. The stable income and long-term tenant demand associated with industrial properties make them especially appealing during uncertain economic times, providing a level of resilience that other asset classes struggle to match.
Outlook for Industrial Real Estate in 2024 and Beyond
As we look ahead, the fundamentals supporting industrial real estate remain strong. Investor demand is expected to keep driving growth in transaction volume and cap rate compression, particularly as e-commerce continues to expand and companies prioritize efficient supply chain strategies. While cap rate compression could mean reduced returns in the short term, the long-term stability and income-generating potential of industrial assets make them a compelling investment.
Additionally, as more global investors seek to diversify their portfolios, industrial real estate in the United States remains an attractive option, offering consistent performance and a relatively low-risk profile. The shift toward digital retail and robust logistics infrastructure is likely to continue for the foreseeable future, further bolstering demand for industrial assets in strategic locations.