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The future of the industrial property market

Preparing for slower demand growth

Saurabh Mahajan

A confluence of factors is reshaping the industrial property sector, creating headwinds and uncertainty. Learn what they are, along with steps market leaders can take to help anticipate and adapt to new conditions.

Will this golden age of industrial property last?

OVER the past five years, the industrial property sector—warehouses, distribution centres, flex spaces and other industrial buildings with storage facilities—has experienced healthy growth while some other property sectors have struggled to sustain demand. Since 2012, year-on-year (YOY) let growth has been positive and the availability rate has continued to decline.1 From 2014 to 2018, the industrial property market experienced a net absorption of nearly 1.4 billion square feet.2 The strong growth can be seen in the Financial Times Share Exchange (FTSE) Nareit Industrial REITs Index, which had a compound annual total return of 16.2 per cent in the five years through April 15, 2019.3 Compared to this, FTSE Nareit's indices for All Equity REITs, Office REITs and Retail REITs had returns of 9.9 per cent, 7 per cent and 4.6 per cent, respectively, during the same full stop (figure 1).4

Macroeconomic factors, tenant requirements, last-mile delivery and rapid technology development are likely to transform demand and warehouse space design.

However, potential shifts in the marketplace may make sustaining this momentum more challenging going forward. Over the next few years, macroeconomic factors, tenant needs, last-mile delivery and rapid technology evolution are likely to reshape demand and warehouse space design. To gain a better understanding of how various macroeconomic factors may affect the industrial property sector, we developed an industrial property demand forecast model. Built in collaboration with Deloitte’s US Economics team, the Deloitte Center for Financial Services’ model estimates future demand for industrial property (see the “Study methodology” section for more details). Here are the key forecasts, based on the model:

  1. Industrial property demand is expected to increase by 850 million square feet, to 14.8 billion square feet, by 2023.
  2. Double-digit growth in e-commerce sales will drive demand for industrial property.
  3. Rising availability rates and higher cost of capital will lower demand growth, as US economic growth is expected to slow down in 2020.

In this report, we will delve deeper into what could drive demand in the industrial property market over the next few years. We will also offer recommendations for how owners can adapt to the potentially slower pace of growth.

E-commerce sales expected to drive warehouse demand

Historically, the manufacturing and retail sectors have driven demand for industrial property. More recently, however, e-commerce companies experiencing double-digit sales growth have been taking up space for more warehouses to fulfil online customer deliveries. US Census Bureau data shows from 2012 to 2017, e-commerce sales grew 14.4 per cent annually, up from 11 per cent during 2007–2012.5 Furthermore, e-commerce deliveries tripled between 2013 and 2018, prompting companies to seek more urban infill warehouse locations so they can provide faster deliveries to consumers.6 Industrial space mirrored this trend, as demand growth rose from 0.7 per cent annually in the five-year full stop from 2007 to 2012, to 1.1 per cent annually from 2012 to 2017.

Ironically, sales are not the only reason e-commerce companies typically need more space. Product returns fill shelves, too. Customers are three times more likely to return products they bought online versus those they bought at a retail shop.7 And, e-commerce companies need 20 per cent more space to manage reverse logistics compared to normal sales.8 In addition, with e-commerce sales expected to grow at 15 per cent annually, reaching 14.8 per cent of retail sales by 2023, the number of product returns will increase too, requiring more industrial space.

Along with e-commerce, the rise in real business inventories and elevated petrol prices is also expected to contribute to increased warehouse demand. Real business inventories are projected to rise 1.3 per cent annually between 2018 and 2023 due to continued increases in consumer spending and improved business confidence, which would require more warehouse space. Petrol prices are expected to average US$2.89 per gallon from 2019 to 2023 versus US$2.77 per gallon in the previous five-year full stop,9 prompting tenants to seek more warehouse space at locations closer to consumers, to reduce transportation costs.

Based on these trends, from 2019 to 2023, our model estimates the demand for an additional 850 million square feet of industrial property in the United States—or, in practical terms, roughly the amount of industrial property space available in Atlanta and Salt Lake City put together.10

From 2019 to 2023, we expect the demand for an additional 850 million square feet of industrial property in the United States, led by e-commerce.

Our model indicates slower growth in incremental demand

Despite the increase in warehouse demand, slower growth is anticipated. In the next five years, the annual demand growth rate will likely decline to a little below 0.9 per cent—nearly one-half of 2018 levels. This is likely due to an influx of space becoming available in the market and the higher cost of capital.

Availability rate could rise as more space will likely become available

Our model shows demand growth tapering as the availability rate will likely rise from 7.0 per cent in 2018 to 10.3 per cent by 2023.11 This is largely because new industrial space will likely become available. For instance, from 2019 to 2020, an additional 510 million square feet of new industrial property space is expected to enter the market, outpacing the 421 million square feet of expected additional demand.12

Apart from new developments coming into the market, many on-demand warehousing startups, such as Flexe and Flowspace, are aggregating underutilised industrial property spaces to fulfil seasonal warehousing needs.13 In addition, some owners are repurposing vacant or near-vacant nonindustrial property spaces to provide more options for renters seeking warehouses in closer proximity to consumers. While retailers are converting stores into smaller showrooms and using the additional space as small warehouses for faster fulfilment, owners of some older office buildings are also converting vacant spaces into industrial property.14 The adaptive reuse extends to underutilised parking lots and garages and even erstwhile churches.15 The increased availability will likely put downward pressure on industrial property rents and prices, though it is outside the purview of our model.

Higher interest rates would increase the cost of capital

Although the Fed has indicated it may no longer raise short-term rates, Deloitte’s US Economic Forecast expects some increase in long-term rates as financial markets return to “normal” conditions. That will likely raise the cost of capital. Our model confirms that a higher cost of capital would also lower demand for warehouses, as both tenants and owners might then focus on increasing efficiencies of existing spaces. The cost of capital is expected to increase from 5.1 per cent at the end of 2018 to 6.4 per cent by 2023.

Apart from slower growth, we believe other risks and uncertainties around trade policy, tax stimulus and potential recession could also affect the demand growth for warehouses.

Apart from these factors, there are other risks and uncertainties that could affect the demand growth of warehouses that are outside the purview of our model. Some include delayed business investments due to uncertain trade policy, including tariffs; the waning impact of the recent US tax stimulus; and a US recession in 2020.16

Owners should consider focusing on more accessible, clever and efficient properties

Industrial property owners face a scenario of slower demand growth, rising competition and higher cost of capital. How should they respond? They could focus on innovation to capitalise on high-growth areas, such as e-commerce and cater to tenants’ demand for more technologically advanced warehouse facilities at strategic locations. They could also prioritise improving the efficiency of their properties and the supply chain to help mitigate rising costs.

Capitalise on high-growth areas

Owners should consider focusing on having a strong portfolio of properties, prioritising locations closer to population hubs. This can help tenants accelerate last-mile deliveries, as customers are increasingly calling for shorter delivery cycle times. Tenants could also be attracted to locations closer to consumers to reduce transportation costs, as petrol prices remain elevated. To have more properties at the right locations, owners should reassess their portfolio and make informed decisions on which properties to retain, sell and acquire. In the past, owners chose warehouse sites based on historical information about traditional factors such as land costs, labour availability, connectivity to major transportation systems and tax rates.

However, owners can now leverage newer data sources and analytics techniques to make smarter location decisions. They could combine information about traditional factors with geocoded data points on regional online sales, consumer lifestyle and behaviour, and traffic movement.17 Then, they could use analytics to understand the impact on the warehouse market and build algorithms to predict alternative future scenarios. Owners need not do this alone and can enlist the help of specialist vendors who offer data and analytics capabilities. For instance, firms like eSite Analytics and Esri use spatial analytics capabilities to provide diverse location-based data sets and predictive analytics capabilities to help with sales forecasting, customer profiling and ensemble modelling.18

Develop smarter facilities to align with evolving tenant needs

While industrial property has lagged other commercial property sectors in technology adoption, that could change. Many tenants, especially e-commerce companies such as Amazon, are looking for more technologically advanced facilities. These tenants are often investing heavily in robotics and automation to lower labour costs.19 Today, robots are shifting racks, but it may not be long before robotic hands could pick up exact units and companies such as Amazon Robotics are working to make that happen.20 Tenants are increasingly using automation to assist in both outgoing deliveries and product returns. Further, many tenants are looking to have smaller spaces spread across key customer markets, instead of having few large spaces serving many markets.

Warehouse owners can help tenants by providing seamless connectivity within and outside their facilities and making spaces conducive to robot movement. This may not require significant structural changes to properties. Owners can also provide more multitenant spaces, answering the call for smaller spaces in more locations. While smarter facilities could stand out favourably in the marketplace, tenants would likely pay a premium for these facilities, even during times of increased supply and competition.

Improve efficiency in warehouses to manage rising costs

Industrial property owners can focus on improving efficiency as cost of capital continues to rise. Consider this: More than 30 per cent of US warehouse buildings are over 50 years old and the average age of all warehouse properties is 34.21 As most of these properties were built to accommodate different types of tenants and offered different capabilities, they may not be very convenient and efficient to operate today. But to improve efficiency, owners cannot only rely on newer developments; they will likely need to upgrade and retrofit older properties as well.

Owners could improve designs and structures to enable more efficient storage, even as business inventories continue to rise. For instance, they can add state-of-the-art features, such as higher ceilings or multilevel facilities for dense and more efficient storage, and more cross-docks and doors to facilitate faster deliveries. Finally, as tenants are increasing their use of technology, owners will likely need to improve connectivity with energy grids to provide more reliable power and could invest in renewable energy sources, such as rooftop solar power. Focusing on these aspects may not only enhance the efficiency of individual properties but the entire supply chain as well. Ultimately, owners’ success in this market could be determined not only by about having more warehouses, but by also creating more efficient and sustainable ones.

Study methodology

Developed in collaboration with the Deloitte Economics team, our study is based on an econometric forecasting model that projects demand for industrial property space and assesses the impact of e-commerce and other factors on warehouse demand.

Key factors that influence warehouse demand: A variety of factors around production, stock, retail demand, fuel and transportation costs, capital costs and industrial property fundamentals could affect warehouse demand. We compared each variable based on fit with our model and importance, selecting these as the top five: the ratio of e-commerce sales to retail sales, real business inventories, petrol prices, the cost of capital and the availability rate of existing properties.

Relationship between identified factors and warehouse demand: We then tested different lag lengths to determine the best fit. We found that e-commerce, business inventories and petrol prices have a positive relationship to warehouse demand with lags of two to six quarters. Conversely, the availability rate and the cost of capital are negatively correlated with warehouse demand, the latter having a lag of one quarter.

Data sources and forecasts: We have used multiple sources for historical data and the forecasts for some of the independent variables.

  • Historical data on e-commerce sales is from the US Census Bureau and forecasts are from the Deloitte Center for Financial Services.
  • Historical data on retail sales and real business stock is from the Bureau of Economic Analysis, sourced from Haver Analytics and forecasts are from Deloitte, using the Oxford Global Economic Model.
  • Historical petrol prices are from the US Energy Information Administration (EIA), sourced from Haver Analytics and forecasts are from Deloitte, using the Oxford Global Economic Model.
  • Historical data and forecasts for the availability rate are from CBRE Econometric Advisors.
  • The Deloitte Center for Financial Services calculated the cost of capital, using historical data from the Bureau of Economic Analysis (BEA), Federal Reserve Bank of St. Louis (FRB) and forecasts from Deloitte, using the Oxford Global Economic Model.

The Deloitte Center for Financial Services

The Deloitte Center for Financial Services, which supports the organisation's US Financial Services practise, provides insights and research to assist senior-level decision-makers within banks, capital markets firms, investment managers, insurance carriers and property organisations. The centre is staffed by a group of professionals with a wide array of in-depth industry experiences, as well as cutting-edge research and analytical skills. Through our research, roundtables and other forms of engagement, we seek to be a trusted source for relevant, timely and reliable insights.

Learn more

  1. Subscribed data from CBRE Econometric Advisors.

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  2. Ibid.

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  3. Nareit, “FTSE Nareit U.S. property index series daily returns,” April 15, 2019.

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  4. Ibid.

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  5. US Census Bureau, accessed March 14, 2019.

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  6. Patricia Kirk, “Former urban big-boxes, class-B office buildings are being converted to last mile industrial space,” National Property Investor, November 28, 2018.

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  7. Patricia Kirk, “E-commerce returns provide growth opportunities for industrial property developers,” National Property Investor, January 15, 2019.

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  8. Ibid.

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  9. Deloitte US economic forecast.

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  10. Subscribed data from CBRE Econometric Advisors.

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  11. Ibid.

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  12. Ibid.

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  13. Emma Hurt, “Warehousing adapts to the e-commerce boom,”, March 13, 2018; Chris Cunnane, “The on-demand supply chain market,” Logistics Viewpoints, September 5, 2018.

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  14. Kirk, “E-commerce returns provide growth opportunities for industrial property developers.

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  15. Ibid.

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  16. Ibid.

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  17. Forum Analytics website, accessed March 15, 2019.

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  18. eSite Analytics, “The eSite Platform: Predictive analytics to enable better targeting,” October 26, 2018; eSite Analytics website, accessed March 7, 2018;, “ArcGIS business analyst,” accessed April 18, 2019.

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  19. Bob Adelmann, “Amazon Robotics is automating everything,” New American, October 18, 2018.

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  20. Ibid.

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  21. CBRE Research, “U.S. MarketFlash | Old storage: Warehouse modernisation in early stages,” March 29, 2018.

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The author would like to extend special thanks to Rumki Majumdar, executive manager, Deloitte Support Services India Pvt. Ltd., and Daniel Bachman, senior manager, Deloitte Services LP, for their contributions towards developing the econometric model.

The centre wishes to thank the following Deloitte client service professionals for their insights to the report: Steven D. Bandolik, managing director, Deloitte Services LP; Kasey Lobaugh, principal, Deloitte Consulting LLP; Rod Sides, principal, Deloitte Consulting LLP; Jim Brock, partner, Deloitte Tax LLP; Gillian Crossan, managing director, Deloitte Services LP; Scott Rosenberger, principal, Deloitte Consulting LLP; Darin Buelow, principal, Deloitte Consulting LLP; Piyush Sampat, principal, Deloitte Consulting LLP; Curt Bimschleger, managing director, Deloitte Consulting LLP; Scott Sopher, principal, Deloitte Consulting LLP; Michael Nayden, managing director, Deloitte Consulting LLP; Thomas Boykin, specialist leader, Deloitte Consulting LLP; Alan Taliaferro, partner, Deloitte Canada.

The centre would like to thank the following Deloitte professionals for their support and contribution to the report: Val Srinivas, senior manager, Deloitte Services LP; Michelle Chodosh, senior manager, Deloitte Services LP; Patricia Danielecki, senior manager, Deloitte Services LP; Erin Loucks, manager, Deloitte Services LP; Rima Pai, analyst, Deloitte Support Services India Pvt. Ltd.

Cover image by: Emily Moreano

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