We already know that the industrial real estate sector has been one of the strongest commercial real estate performers as of late. However, with deliveries already slowing down, CommercialCafe gathered industry experts’ opinions on what the market might look like in the next few years.

Specifically, we asked them about the biggest challenge facing the market, the effect of e-commerce on industrial real estate development, the future of manufacturing in the sector and other trends to watch out for in the upcoming year. Keep reading for their valuable insights.

Meet our Experts

What is the biggest challenge that the industrial real estate sector is facing this year?

Michael Glimcher

“The rising and relatively high cost of capital is probably the most significant factor impacting the industrial sector. Rising rates have impacted business growth expectations for industrial space users and made it more costly for those users to make investments into their facilities. This combination has led to a modest softening of demand in many markets.

Another big challenge is supplying these spaces with the energy they need to run properly. There is only a finite amount of energy and, in some cases, it can be difficult to supply the spaces with power. I believe developers who are able to provide modern properties in desirable locations that can handle today’s robust power needs will have a significant advantage.”

Jared Riemer

“The Fed’s changing interest rate policy has really increased the cost of capital, disrupting the capital markets and the value of industrial real estate. Cap rates have expanded significantly, and it’s been more challenging to get capital for industrial investments, especially debt.”

Brett Turner

“This year’s greatest challenge for CRE has inarguably been stubborn interest rates. While we now have more clarity on where rates will ultimately rise, the rate cuts that were expected by the end of 2023 now seem unlikely. With at least one more uptick expected by the end of the year, the pressure on lending institutions — primarily lenders of loans over $100 million — will continue into 2024.”

David Tully

“[1] Increased sublease space due to oversupply: The builders were able to deliver industrial space of 143 million square feet (73% of those completions were speculative, yet there was a 37% yearly growth). The industrial real estate sector faces a significant challenge this year due to a 46% increase in industrial sublease space since early 2022. This surge began in the middle of last year when recession fears led to reduced online purchases, resulting in excess warehouse inventory for many retailers. Amazon’s move to sublease 10 million square feet of industrial real estate added to this trend. As a consequence, net absorption rates dropped by 15% year-over-year in Q4 2022, and quarterly rent growth fell from 4% in Q3 to 0.9% in Q4. The sector is also grappling with a surge in speculative completions, which may raise nationwide vacancy rates from the 3.3% recorded in Q4. Despite these challenges, analysts remain optimistic about the industrial real estate market’s long-term prospects, driven by sustained demand from online retailers and logistics companies. Property owners are advised to consider short-term leases and increased build-out allowances to attract tenants in the current market.

[2] Insufficient greenfield space: A shortage of suitable greenfield space for new projects is another dynamic challenge in the current market climate of industrial real estate. Balancing land acquisition costs against workforce accessibility has traditionally been a key consideration. Purchasing expensive greenfield sites may lead to high rents for tenants, while remote locations can deter cost-conscious companies due to employee commuting costs. Additionally, fees associated with transporting goods from seaports or freight depots to warehouses pose challenges. Developing brownfield land is a potential solution, but it can face opposition, causing delays. However, it offers faster construction timelines, addressing the demand for same-day delivery.”

Do you think that e-commerce will continue driving industrial real estate development?

Michael Glimcher

“Yes, I do believe that e-commerce will continue to be an important factor driving industrial real estate development, but it is only one of many drivers. Other categories — such as distribution, third-party logistics and transportation, to name a few — also all play important roles. So, yes, I believe the e-commerce trend will continue, but other factors will also be vital in industrial development.”

Jared Riemer

“E-commerce expanded very rapidly during the pandemic to adjust to changing consumer needs as brick-and-mortar retail shut down. Many tenants expected that e-commerce would continue to grow above previous trends and they expanded their real estate footprint accordingly. Now, consumers are shifting their spending to services, and e-commerce has returned to its pre-pandemic trend line and many tenants are still growing into their industrial real estate footprints. E-commerce will continue to be a long-term demand driver for industrial real estate, but it seems like it may have over-expanded in the short-term in response to the pandemic.”

Brett Turner

“E-commerce will certainly continue to expand since it’s such a critical component of the multi-channel retail network. In the past couple [of] years, however, we’ve also seen tremendous growth in other innovative uses, such as advanced manufacturing. The reshoring phenomenon in the wake of the pandemic — combined with technological advancements and massive federal initiatives to promote U.S. manufacturing — has reinvigorated the industry, and this will continue for some time.”

David Tully

“Yes, e-commerce is expected to remain a driving force in industrial real estate development due to the ongoing consumer demand for online shopping and the need for efficient warehousing and distribution to meet this demand. The convenience and selection offered by online shopping have become ingrained in consumer behavior, making it a sustainable driver for the industrial real estate sector’s growth.”

In your opinion, where is the future of manufacturing in industrial real estate heading?

Michael Glimcher

“It’s always difficult to predict the future, but one area that I believe is going to be very significant in the future of manufacturing in industrial real estate is onshoring. As we saw through the COVID-19 pandemic and the recent political landscape, having the ability to supply manufacturing operations in the U.S. can provide significant advantages. As companies seek to simplify supply chains and avoid any possible political headaches, onshoring will contribute to an increased demand in industrial properties.”

Jared Riemer

“Manufacturing is diversifying its footprint both globally and locally. It’s tough to say where it’s heading, but we are seeing more manufacturing uses return to the United States in order to create supply chain resiliency.”

Brett Turner

“The use of artificial intelligence and automation is becoming a greater contributor to manufacturing, which is accelerating the evolution of industrial real estate. We’re seeing this particularly in the semiconductor space, where AI is fueling greater productivity and innovation. Accordingly, our tenants that produce components for these manufacturers also have a continued need for expansion.”

David Tully

“[1] Technology integration: In New York alone, the global industrial robotics market was valued [at] $48.5 billion at the start of the year. Automation and technology adoption are becoming integral to manufacturing within industrial real estate. The use of industrial robots and advanced technologies in factories and warehouses is expected to increase, making manufacturing more efficient and less space-intensive. In industrial real estate manufacturing, the integration of technology like robotics and automation is projected to increase by 11.4% in 2032 ($142.8 billion).
[2] Demand for flexibility: Small industrial properties — often referred to as flex space — will remain in high demand due to their affordability and adaptability. These properties cater to a variety of business needs and are expected to continue being sought after. Although adoption rates will vary by industry, still the anticipation is that 30% of the market will be made up of flexible space by 2030.”

Will innovations such as multi-level warehousing be slowed down?

Michael Glimcher

“Overall, I believe that, as the industrial sector continues to evolve, innovations in development will also continue. Multi-level warehousing is an important trend in urban areas where land development can be difficult and expensive, and, in general, buildings are getting taller as they must now support new automation technologies. With the growth of these technologies, buildings must also adapt, as well.”

Jared Riemer

“As capital supply to industrial real estate development has slowed, we’ve seen less interest in risk-taking generally, which will likely affect investment into new and innovative designs for warehousing, such as multi-level warehousing. Cap rate expansion and rent stagnation will also make densification less economical in the short term.”

Brett Turner

“The spike in interest rates and general uncertainty about the direction of the market is going to make development tough for a period. With developers pressing the brakes on traditional warehouses, experimental designs — such as multi-level warehouses — will likely be put on hold until the cost of capital comes back in line and construction pencils out.”

David Tully

“Infrastructure investment: Governments and private entities are investing in improving urban infrastructure, including transportation and logistics. Multi-level warehouses can play a vital role in supporting these efforts by providing storage and distribution hubs in urban centers.”

What are your predictions regarding industrial real estate trends in 2024?

Michael Glimcher

“The combination of a modest reduction in demand and some as-yet unabsorbed new industrial supply has curtailed the rate of rental growth in many markets during 2023, but the construction pipeline has significantly diminished, and we expect to see stronger rent growth return in 2024. Historically, U.S. industrial rent growth has shown impressive momentum, while the rent costs are normally a small portion of the total logistics costs for the tenant. Hypothetically, even a 25% rent increase would only increase the overall cost burden by about 1% in many cases. Developers who are able to supply modern properties may be able to take advantage of these increases.”

Jared Riemer

“We’ll be keeping a tight focus on the health of the consumer, and we’ll look to see whether consumer spending patterns shift back to goods-sector spending and away from service-sector spending. If strong consumer spending comes back to the goods sector, then we would expect to see an increase in tenant demand. We’re not expecting interest rates to come down materially in 2024, so we expect the cost of capital and cap rates to remain elevated.”

Brett Turner

“If the Fed ceases its interest rate hikes like many expect, the market will go through a period of adjustment next year. Still, cap rates will likely hold steady through 2024 and rents will continue to climb — albeit at a slower pace than the unprecedented growth we saw in the post-COVID period.”

David Tully

“Smaller, but better offices in corporate real estate. In 2024, industrial real estate trends are expected to align with the changing dynamics of work. Companies are likely to adopt smaller, more efficient office spaces, with reductions of 20% to 50% in office footprints observed. Premium-grade offices will focus on providing an exceptional employee experience, featuring flexible workspaces, fitness centers, and eco-friendly designs. Some office spaces may be repurposed for mixed-use developments, addressing community needs. Sustainability will remain a priority, with a move towards green-certified buildings, zero-carbon emissions, and eco-conscious practices, driven by both environmental concerns and upcoming regulations.”

What will the industrial market look like in the next three to five years

Michael Glimcher

“The industrial market is strong, and I don’t see that changing any time soon. Manufacturing, e-commerce, onshoring — these are just some of the drivers that will continue to push people into industrial properties. Even if one of these drivers is to slow down, the others will continue to drive demand, especially for modern industrial properties that are able to meet the evolving needs of the sector. Groups that focus on developing or acquiring buildings that can keep up with (and stay ahead of) this industrial revolution have the potential to be very profitable.”

Jared Riemer

“In the longer term, we expect industrial real estate demand to be supported by longer-term drivers, like e-commerce. The lack of availability of construction lending starting in 2022 helped moderate supply in many markets. In SoCal, supply has also been inhibited by a challenging entitlement process and the lack of large land sites, especially for larger logistics product. These supply challenges should help those markets return to a healthy vacancy level that should support long-term rent growth again. These dynamics will continue to make industrial real estate a preferred asset class for institutional investors.”

Brett Turner

“COVID brought attention to the need for reliable logistics and manufacturing. Tenants will continue to see their real estate as a larger part of their overall operating expense than before. This reframe has created a fundamental demand shift that will put upward pressure on rents.”

David Tully

“Over the next three to five years, the industrial market will see ongoing growth and transformation. Industrial and apartment rents — which will peak by the end of 2023 — will maintain strength, but at a slightly lower pace in the following years, with yearly increases averaging 5.9% and 4.5%, respectively. Retail rents are predicted to grow annually at an average rate of 1.7% with a dip expected in 2023. Office rents will experience minimal growth, with the most significant gains anticipated in 2024. Total returns will temporarily moderate to 3.8% by the end of 2023 and are projected to strengthen to 7.0% in 2024, although still below the long-term average. Property-wise, 2024 returns are expected to range from industrial properties at 9.6% to office properties at 4.1%”

If you found this article useful and informative, please feel free to check out our Expert Insights & Roundup Series.

The post Expert Roundup: The Future of Industrial Real Estate appeared first on CommercialCafe.

F.L.Putnam — a Portland, Maine-based financial planner — is relocating and expanding its office space in Midtown East.

Having signed an 11-year lease for a workspace on the sixth floor of 445 Park Ave., the investment adviser is scheduled to move into its new, 6,000-square-foot premises by early December. According to the brokers, the asking rent for office space within the Circle Realty Group-owned building is in the $90-square-foot range.

Following the deal, Putnam will be looking to move out of its current location at 805 Third Ave. The company has additional locations in Massachusetts, New Hampshire and Rhode Island.

Jay Futersak, president of landlord Circle Realty Group, represented the landlord in-house, while a Compass team comprised of Adelaide Polsinelli and Lauren Curcio negotiated on behalf of F.L.Putnam.

Futersak said that the new tenant would be “a good complement to all the high-net-worth family offices we have in the building.”

“We signed four leases in the last four weeks, and we’re seeing tremendous absorption on Park Avenue,” he continued. “I think Park Avenue is extremely in demand. We’re busier than ever, 95% leased. We’re very full.”

Other tenants at 445 Park include the likes of residential real estate firm Brown Harris Stevens, financial planner Alfest Wealth Management, and collectibles specialist Heritage Auctions.

“445 Park Avenue’s lease is a testament that there is life in office buildings in prime Midtown locations,” Polsinelli said. “Businesses are adopting a back-to-the-office stance and have used the past few months to reorganize and rethink their needs.”

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Virtru, a data security and privacy company, has opened its new headquarters at 1801 Pennsylvania Ave. NW in Washington, D.C. The company had signed a lease for the 17,000-square-foot space in November 2022.

Virtru’s new headquarters, called the Hub, is designed to act as the focal point of the local cybersecurity community.

“Innovation has always been at the heart of Virtru’s mission, and the Hub builds on this commitment,” said John Ackerly, co-founder and CEO of Virtru. “We designed a space that can uniquely function as a collaboration center for the District’s thriving cybersecurity community. Cybersecurity is a team sport: We need to bring many partners and customers to the table, and we look forward to facilitating those conversations across the private and public sectors.”

The Hub occupies the entire fifth floor of the 13-story office building owned by Pembroke Real Estate, and is almost twice the size of Virtru’s previous space at 1130 Connecticut Ave. NW. Having acquired 1801 Pennsylvania Ave. in 2006, Pembroke recently made several capital improvements to the building, including a revamp of the lobby; the addition of a lounge and coffee bar; as well as the fitting of floor-to-ceiling windows along the Pennsylvania Avenue corridor.

“We’re proud to have incredible companies like Virtru that are choosing to grow and expand right here in the Capital of Innovation,” said D.C. Mayor, Muriel Bowser. “At the heart of D.C.’s comeback is how we bring people back together to live, work, and play, and we’re using every tool at our disposal — including the Vitality Fund — to attract and support employers that will help us bring the people, fill the space and create a thriving downtown D.C.”

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For decades, the Midwest was known as the industrial heartland of the nation, and the place where the goods, tools and machinery that drove the U.S. economy were produced. But, as a wave of deindustrialization hit the region starting in the 1980s, Midwestern cities were faced with the challenge of rebuilding their fortunes in a new age of tech dominance.

So, to better gauge the progress made — and as a follow-up to our previous analysis on Midwestern and Northeastern cities in the decade after the financial crisis — we ranked the 20 best Midwestern metro areas for tech development, according to nine metrics. Specifically, our analysis included data on the local ratio of tech businesses; tech employment within the wider local economy; and the number of patents granted, as well as unemployment rate and educational attainment. For a breakdown of all of these indicators, along with data sources and other details, please consult our methodology.

Keep reading to find out more about each metro’s overall score, as well as the various performances of entries across each indicator.

Madison Ranks Best in Midwest, Chicago Snags 3rd With Highest Earnings for Tech Workers

Madison, Wis., led the ranking with a total of 66 points and strong performances across several metrics. For instance, the metro boasted the highest ratio of tech employment opportunities among all of the entries with 71 of every 1,000 occupations being within this sector. Professionals employed by tech businesses in Madison can also expect to be well-paid for their knowledge and skills as the Wisconsin metro area had the second-highest earnings for jobs in this industry on the list (roughly $89,000 per year).

In second place, Ann Arbor, Mich., also did well in terms of providing attractive employment opportunities for top tech talent with the third-highest job density on the list for this sector. More important, Ann Arbor landed in first place for its tech establishment density with 46 of every 1,000 firms registered within the Michigan metropolitan area falling under the tech category.

The Chicago metro area closed out the top three with a total of 59 points. And, by earning top scores for two individual metrics relating to patenting, Chicagoland showed its continued strength as a center for industry and innovation. Furthermore, of the 20 best metros in this ranking, the MSA was home to the highest number of tech patents (more than 8,000), as well as the largest pool of organizations and companies that contributed to tech innovation between 2018 and 2022.

However, it wasn’t just the highest-ranking entries that stood out due to great performances. As a matter of fact, Columbia, Mo., (#7 overall) was the leader in tech company growth after witnessing a 14% increase in the number of firms in this sector between 2017 and 2021. Additionally, Columbia was also the highest-scoring entry across the life-quality index, which looked at the unemployment rate, educational attainment across each metro area and the regional price parity.

In a similar vein, the highest increase in tech employment occurred in Rochester, Minn. (18^th place), while Sioux Falls, S.D., recorded the most significant percentage growth in median tech earnings (45%).

Ann Arbor Metro Outranks Minneapolis & Chicago for Tech Establishment Density

Already known as a hub for automotive and mobility-related tech, Ann Arbor, Mich., claimed the first spot for its tech business density — 46 out of every 1,000 companies in the metro area fell under that category. In addition, Ann Arbor is home to a wide range of companies in terms of their size — from the likes of Toyota Motor North America R&D Headquarters to startups like May Mobility, Censys and Blumeria.

Next, the Minneapolis metro came in second for this metric, albeit at a 15-point difference: The latest records available showed that 31 out of every 1,000 firms registered in the area were labeled as tech businesses. Notably, some of the tech companies that currently have a presence in this Minnesota metro include the likes of health care technology innovator Optum; fintech developer Pennymac; and agricultural and forestry machinery and technology service provider John Deere.

Not to be outdone, Madison, Wis., scored a very close third in this category, just 0.1 points behind Minneapolis. Here, the University of Wisconsin-Madison plays a key role in the metro’s tech sector growth as it funnels well-educated graduates and professionals involved in cutting-edge research toward the various tech companies that call Madison home.

Outside of the top three places in terms of tech business density, the margins between the remainder of the entries were rather tight. For example, in the Chicago and Columbus, Ohio, metro areas, roughly 26 out of every 1,000 registered firms fell under the tech category, whereas, in Kansas City, Mo.; Lincoln, Neb.; and Detroit, the ratio was closer to 21 out of 1,000.

Columbia, Mo. & Lansing, Mich. See Double-Digit Growth of Tech Business Sectors In 5 Years

Between 2017 and 2021, Columbia, Mo., led the ranking in terms of percentage growth of tech establishments among the metros in our list. More precisely, Columbia recorded a 14% increase in the number of local tech firms during the surveyed period. But, in addition to being a fertile ecosystem for burgeoning companies, Columbia is also a good business environment for growing established companies. In particular, EquipmentShare — founded in 2015 — is a nationwide construction solutions provider playing a big role in the local business scene. And now, the company is ready to take the next step with plans to create more than 500 new jobs and expand into a new headquarters in Columbia.

Next up, Lansing, Mich., boasted a 10% increase in the number of local tech establishments, while Springfield, Mo., saw a hike of roughly 9%. In this case, Springfield’s third-place finish in this category was also the metro’s best performance across the indicators considered in this study.

Closing out the top five, Sioux Falls, S.D., and Fargo, N.D., each witnessed an 8% bump in their shares of tech companies within their metropolitan areas.

At the same time, Columbus, Ohio, stood out for the 44 new tech companies that it welcomed in the course of the last five years, making this the largest increase by numbers across the top 20. Without a doubt, landing the massive new Intel chip factory last year will be a massive boom to Columbus’ attempt at establishing itself as a leading tech and manufacturing center, both nationally and internationally.

Yet, despite these positive trends, several entries in the ranking struggled and, ultimately, lost tech businesses. For instance, Chicago was hit by an exodus of major companies in 2022, including investment firm Citadel, Boeing and insurance giant Allstate. And, while most of the high-profile exits wouldn’t be labeled as tech companies, large shifts across adjacent industries can cause a ripple effect throughout the local economy.

Tech Employment in the Midwest: Madison Home to Most Tech Workers; Rochester Minn. Sees 47% Jump in Tech Jobs Since 2017

Echoing their great performances in terms of tech-firm density, the Madison, Wis.; Ann Arbor, Mich.; and Minneapolis metropolitan statistical areas also scored among the top five for tech employment opportunities. Naturally, their pecking order was reshuffled somewhat for this metric with the Wisconsin metropolitan area taking the lead ahead of its neighbors to the east and west.

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Genius Sports will be moving to its new headquarters in New York City after reaching an agreement for a lease deal at 825 Third Ave. Specifically, the sports data and tech company is set to occupy a pre-built, 11,900-square-foot prime Midtown office space at The Durst Organization-owned property as it moves on from its current location at a Convene coworking site in the Financial District.

Tom Bow, Ashlea Aaron, Lauren Ferrentino and Bailey Caliban handled the negotiations in-house on behalf of Durst, while a Newmark team made up of Joshua Berg and A.J. Dorn represented Genius Sports. The asking rent was $102 per square foot.

Recently, Durst completed a $150 million renovation at its 530,000-square-foot office tower, which included upgrades to the building’s lobby, the addition of a new tenant amenity space, and the installation of smart windows that adjust the amount of light that comes in via the use of artificial intelligence.

“Genius Sports, like many companies, is drawn to 825 for its ideal location; modern, fully renovated offices; and the brand-new amenity floor that offers indoor and outdoor spaces for tenants to work, host events and socialize,” Aaron said. “Genius Sports also chose the building because we were able to deliver a fully move-in ready space through our DurstReady program. They arrived at the building to a beautiful, fully furnished, fully wired office custom-built for their team.”

“825 Third Ave. is being modernized from top to bottom, and its transformation into a trophy asset is nearing completion,” Jonathan (Jody) Durst, president of The Durst Organization, said. “Genius Sports is in good company at 825, joining tenants that have pre-leased more than 100,000 square feet of space in just the past two months.”

The tenant roster at 825 Third Ave. already includes names such as Toyota Tsusho America, the National Bank of Egypt, and law firm Beveridge & Diamond.

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