Investing in warehouses and manufacturing facilities has proven to be a wise decision in recent years. However, the question remains whether this trend will continue in the next 12 months. After considering the office and retail market in previous articles, we have now also identified three key trends that are likely going to shape the industry this year.
In the following article, you will find out which technological and economic factors have influenced the way industrial real estate is presumably going to change in the near future. To provide some more context on what has happened so far, let’s start by taking a look at changes in the previous year.
3 Key Industrial Property Market Trends in 2023
- Low Vacancy Rates Continue
- Life Sciences Sector Stays Strong
- Supply Chain Resiliency
What Happened in 2022?
Due to the rising demand for logistics with strong growth in the e-commerce sector, industrial properties have performed particularly well in 2022. This relates to the entire supply chain, from manufacturing facilities to last-mile delivery units close to the final customer. While this trend seemed to continue over the year, there have been numerous global events that have impacted the economy, as well as retail growth.
With rising inflation and interest rates, as well as high energy costs in many countries, businesses had to adopt new strategies that can compensate for these expenses while maintaining sustainable levels of profit. Furthermore, factors such as climate change and geopolitical conflicts with a global impact have affected supply chains significantly. Many smaller retailers and even Amazon have taken measures to cut costs by closing warehouses throughout different countries.
Recently, certain industrial properties have begun to relocate to urban areas, such as last-mile logistics facilities, which are designed to quickly deliver goods to customers. As more businesses offer same-day delivery services, the demand for these types of industrial properties has grown in 2022.
3 Key Industrial Property Market Trends
As a result of all the events from 2022, even the industrial sector has challenges to overcome in 2023. The following three key industrial property market trends are what we think are likely to occur over the current year.
1 | Low Vacancy Rates Continue
Vacancy rates for industrial properties have been low in many countries due to strong demand by investors and businesses. While the overall economic situation is putting pressure on the market and retailers might be affected by reduced consumer spending, vacancy rates are predicted to stay well below long-term averages.
This can be explained by fewer new developments in the industrial sector. Even though many projects are being completed at the time, new ones face challenges due to higher interest rates and construction costs. Consequently, financing is less readily available and profit margins will shrink for developers. With fewer new builds, rents are predicted to rise till 2025.
All of these changes will be affected by the overall economic growth in 2023 and might change to some extent. Nevertheless, due to the low construction rate, it is still estimated that demand will push rents to increase over time.
2 | Life Sciences Sector Stays Strong
Another of the industrial property market trends that might continue in 2023 is the importance of life science properties. This relates to manufacturing, distribution, R&D or other similar facilities in the sector. Due to strong demand during the pandemic, many new buildings are being completed at the current point in time.
While the global economic situation is also impacting the life sciences sector, it seems that the demand is likely to continue. Compared to other industries, a large amount of capital is still being invested in the industry even if it has slowed down from earlier years.
Also, many large companies are acquiring smaller life science startups or businesses, which could lead to new demand in the manufacturing and logistics sector. One last factor that can confirm the continuation of this trend is the rate of hiring. Compared to any other industry, life sciences sees the highest increase with about 6.6% over the last 10 years.
3 | Supply Chain Resiliency
Due to numerous issues with global supply chains such as the Covid-19 pandemic, high transportation costs, increasing energy costs, and staff shortages, businesses and countries are looking to adapt their strategy with a more resilient approach. These changes have also had a substantial impact on the property market.
An increasing number of businesses move their manufacturing facilities to new locations, closer to their final customers. While production costs might be higher, this can improve the supply chain, which ultimately will help the company more. One trend that arises from the issues mentioned previously is, that demand for industrial properties close to major cities and transportation hubs will rise. This is due to the great accessibility to either final consumers or other logistic centres.
Another trend will be the shift from global decentralised supply chains to more centralised ones. Therefore, some US companies for example are changing manufacturing and distribution facilities from China back to the US or new locations. This is especially due to the tight restrictions in the country during the pandemic.
Conclusion
All in all, the industrial property market is likely to show stable growth over 2023 and continues to be a solid asset type. Even with the economic and political instability, warehouses, manufacturing, and R&D facilities have a continuous demand. Especially, properties in the life sciences sector seem to perform well. With fewer new developments, the low supply can possibly lead to increasing rents if the need for industrial buildings stays strong. Consequently, we anticipate the three mentioned industrial property market trends to have an impact in 2023.
If you want to learn more about the future of commercial real estate, including topics such as sustainability & ESG, PropTech, architecture, development and investment, feel free to take a look at our other articles on Smart CRE. Here you will also find insights into the job market and how to start a career in real estate.
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