Beyond Ecommerce: What Else is Driving Demand for Industrial Space?
In 2022, Montgomery County has more than 1 million square feet of industrial space in the development pipeline. By comparison, the same region developed just 280,423 square feet of industrial space in 2021.
These numbers may be a little surprising because the industrial sector boom has been on full display the past few years due to the meteoric rise of ecommerce. But by the looks of the current pipeline, that was just the beginning.
So what is driving the high demand for industrial space in our region and beyond? The easy answer is ecommerce, but there is more to the story. Online retail alone isn’t responsible for the sustained demand for industrial space - especially when you consider that this started long before 2020. Let’s take a closer look at the many factors driving this uptick in demand, and consider what it means for the industry.
Follow the Leader
A legacy driver for real estate demand - residential, commercial, and industrial alike - is population density. Where there is a high volume of people, there is a high volume of development. What has changed over the past few years is where people live, particularly millennials. Millennials are in the phase of life that is dominated by settling down and establishing roots, often in the suburbs. And as of 2021, millennials eclipsed baby boomers as the largest generation (21.75% of the US population vs 21.16%), so when we put those two things together, we see an increase in population growth in suburban areas.
But the suburbs have had a high population density for many years, right? Can millennials really be that impactful - and what does this have to do with industrial space? This is where ecommerce comes into play. Millennials are the generation most acclimated to ecommerce, and most likely to be reliant upon it as well. So as this population shifts to suburban environments, retailers need to better service that population with products (and warehouses), closer to their home.
The Last Mile
At the same time ecommerce began to boom, retailers were increasingly focusing on the “last mile”, a topic we’ve discussed in this blog in the past. The last mile is the final phase of the ecommerce supply chain - that last link between customer and distributor. The “shorter” (so to speak) that you can make the last mile experience for customers, the more reliable a retailer is perceived to be, the sooner a customer receives their goods, and the happier they will be. So how do retailers shorten the last mile? Again, by building more warehouses, closer to their customers.
The last mile is critical for building and maintaining a positive customer experience, but there is also another benefit to being close to consumers. The last mile is the most expensive part of the supply chain, accounting for more than half of total supply chain costs. So while securing and developing industrial space is a large, upfront expense, investing here very often proves to be a savvy financial decision for the long-term.
Onshore, High Efficiency Labor
Over the past 30+ years, many companies relocated a substantial number of business operations offshore, including warehouses. In recent years warehouses have been shifting back onshore, due in part to a more efficient labor market driven by advanced warehouse automation technologies and tools.
The high-tech, labor efficient warehouses of today are often new development. Even in locations where older facilities exist, it can be difficult to adapt the space for the required warehouse automation machines and tools. When possible, they are refitted to support the advanced sorting, picking and reverse logistics needed by ecommerce and large retailers, but when they are not, a brand new build is required.
Another demand for industrial space, albeit small at this time but with the potential to grow, is cowarehousing. Similar to the coworking model that experienced exponential growth through the 2010s, individuals or organizations rent a large space just this time a warehouse, and then break it into smaller spaces for smaller businesses to rent. The demand is a bit limited in scope at this time, but just as coworking exploded (WeWork alone still has 756 locations), we expect cowarehousing to flourish in the coming years.
Supply Chain Slowdown
One last driver of the ongoing demand for industrial space in our region and beyond is the supply chain slowdown. Builds and development project timelines that were more efficient in the past are now less reliable because product just isn’t arriving on time. When we combine the delay for materials, a highly competitive labor market and a demand for space, it is near impossible to catch up. This trend also has a snowball effect in keeping vacancy rates low and rents high, which then furthers the demand for more space.
While ecommerce is responsible for much of the demand for industrial space, placing all of the responsibility there is too simplistic. The growth in ecommerce is highly visible, but these additional micro and macro trends have come together to drive this incredible demand for industrial space which some analysts expect to continue for years to come.