Industrial Sector Update 11/1/2015

A report from CBRE stated that, as of second quarter 2015, an increasing number of automotive companies are reshoring manufacturing in the U.S. This has significantly affected international industrial markets, as the restructuring continues to restore America to its role as a center for production. Companies like Volvo Car Corp., which will begin operations at its first U.S. manufacturing facility in 2018, are relocating from Asia, where there are growing production costs and supply chain complexity, to the U.S. and Mexico. The American South (particularly cities near seaports) has leveraged its productive advantages — particularly its port infrastructure, comparatively low costs of labor, and government incentives — to become a growing industrial hub. Mexico has seen the greatest benefit of all, experiencing a dramatic increase in auto production through 2015, and a significant future investment from the auto manufacturers. This will prompt long-term growth of U.S. distribution and logistics, especially in Texas and the Midwest, where there will be increasing auto distribution demand.

Rapidly increasing occupancy and absorption rates are making it difficult for industrial properties to be built fast enough to meet demand. With such high demand and low vacancy rates, the industrial sector continues to see a higher average cap rate (the potential percentage return an investor would receive on his or her investment) of any asset class. In addition to new developments currently under construction, a growing share of supply is speculative development, indicating expected future growth. Following the recent recession and its accompanying supply shut-off, companies focused on acquisitions because of an increase in vacant space and a difficulty in leasing property. Now, in light of improved leasing, most industrial firms are redirecting focus to construction. This can be attributed largely to e-commerce, which has changed the speed at which orders are processed and goods are transported, and has consequently necessitated acquisition of industrial space. In addition, an upsurge in U.S. development, especially in major distribution centers like Dallas, Los Angeles, and Kansas City, has resulted from the rising demand for industrial manufacturing space, and companies are acting quickly to buy and develop the land in light of this growth.