Industrial – A Cool Down But Not by Much

As industrial comes off a strong run of development in recent years, 59% of respondents to the Summer 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey believe that supply and demand will balance out, with demand exceeding supply again by 2027. The return of traffic at California’s seaports and continuing high consumption levels are also contributing to more positive sentiment. Any pessimism centers around rental rates and vacancy rates being no better than today, which is not pessimism in the usual sense. Both the percentage of panelists that started new projects during the last 12 months and the percentage planning to begin new projects over the next 12 have declined, which seems to be a reflection of normalizing developer activity. Aly Shivji, Partner at Allen Matkins, and Evan Kantor, Head of Kennedy Wilson’s Commercial Investment Group, explore these and other factors seen to be influencing the industrial space markets.

AI is Coming … But Not Quite Yet

The use of technology, including AI, is on the rise – from anticipating what the supply chain is going to look like and reducing carbon footprints to robotics that help pick parts. But, says Shivji, “Despite the increased demand in data centers, specifically for AI infrastructure, few of our respondents are actually using AI to inform and develop their strategies going forward.”

Ecommerce is Trending

California is seeing an increased demand in e-commerce, a trend that is spreading nationwide. “As much as people are focused on data centers or EVs, e-commerce still remains the most significant component of industrial development, and I think that trend will continue,” says Shivji. The demand for logistics facilities, whether it's warehouses or distribution, will continue to grow as more Americans turn to e-commerce.

Crossing that Last Mile of Supply

While sentiment is high across the country, construction costs also continue to be high. According to Kantor “post-pandemic, we realized that we needed onshoring and nearshoring, and industrials are stepping up to solve those issues for last mile supply chain.“ However, Shivji says, due to high costs, more developers are pushing for yield on cost models instead of fixed base rent models for new development sites. Developers have to be creative since the old economic models don't work as well in the high-cost environment.

A Skilled Workforce is the Hub of Growth

In the industrial space, Shivji sees growth happening in geographic locations that have strong workforces as well as low-cost construction, low-cost regulatory compliance and in the data center space, specifically, availability of power. Kantor concurs, “A major skilled labor shortage is what’s driving where the hubs for industrial and distribution are really growing the most.”

Industrial, While a Mixed Bag, Still Remains a Favorite

Like all asset classes, industrial is a mixed bag: in some cases there is a softness in the market; in the current rising interest rate environment, it’s really hard to get new construction to pencil. According to Kantor, though, the forecast is bright. “From an investor standpoint, whatever oversupply there is, it's quickly going to be absorbed and industrial will continue to be a favorite asset class.”