If you answer is something along the lines of “good fundamentals,” then you’re probably chasing deals in the same 20 markets as everyone and their cat. This herd mentality is fine and there are certainly risk-related analyses to justify the approach, but the ability to deploy capital in those markets is becoming increasingly about how low you are willing to accept yields. The approach may also not be doing justice to the question as to why fundamentals are good in the first place. It’s not because of a bourgeoning US economy.
Fundamentals in US industrial real estate are strong because of e-commerce (and m-commerce and s-commerce, while we’re at it). It’s a for-real paradigm shift of the kind not seen since the industrial revolution, and if you’re not paying attention to the idea that such a shift will change every bit of the very supply chain itself, you may also be missing opportunities.
Thinking outside the box is no cliché in this arena. The new world of e-commerce has already shaken the retail real estate industry so dramatically that store locations and footprints and their very use (is it a store or a distribution center?) are all being called into question. Can big-box retailers really continue to “pay the freight” (pun intended) to open a store in a high-priced location if over 50% of the goods purchased will come from online orders and be shipped out to the customer’s home without the customer ever setting foot in the store? And can big-box distribution centers adequately deliver goods next day or same day to Boise all the way from Nashville? We believe that thinking outside the box in this environment means decentralization: smaller facilities closer to population centers.
Aside from delivery challenges, the efficiencies of the supply chain are being challenged further by changes in the shipping industry: cost pressure, overcapacity, Panama Canal expansion, continuing labor union struggles, and a newly emboldened anti-trust regulator in China putting the squash on P3, to name a few.
The bottom line is that to maximize the potential returns in the industrial niche, one must think in terms of the new dynamics from the demand side and resist following the crowd to the next 5-cap deal in the obvious markets. New critical locations are emerging. Intermodal has arrived. New requirements are being placed on facilities in those locations. Those who solve the puzzle and venture forth to the new world will prosper.