What trends are shaping the future of the industrial sector? Four experts from ULI’s Industrial and Office Park Development Council talk about the industrial submarkets and property types that offer the greatest opportunities, challenges developers face in bringing new projects to market, ways artificial intelligence and emerging technologies are reshaping the sector, tenant priorities, and other key trends.
Contributing their insights:
- Val Achtemeier, vice chair, CBRE, Irvine, California; chair, IOPC (Gold Flight)
- Adam Herrin, founder and chief executive officer, Formation Interests, Dallas, Texas; member, IOPC (Red Flight)
- Austin Maddux, executive managing director, investment management, Foundry Commercial, Los Angeles, California; chair, IOPC (Black Flight)
- Will Strong, executive vice chair, Cushman & Wakefield, Phoenix, Arizona; chair, IOPC (Red Flight)
What submarkets or property types within industrial real estate are you most bullish on and why?
Val Achtemeier: We had a lot of growth and development over the last five to ten years, and now development has slowed dramatically. Demand during Covid was extremely robust, and rents accelerated at a faster pace than we had ever seen. Right now, some markets have higher vacancies: vacancies were 1–3 percent in most markets, and now they’re back up to 5–10 percent. It’s part of a normalization in the sector. On property types, I still like e-commerce [and] larger logistics buildings in the long run. In the short run, some markets are oversupplied, but e-commerce is going to continue to grow, and there will be a need for larger distribution centers, as well as smaller sorting facilities. I think you’re going to see those get more automated with robotics, and AI is going to start to play a bigger role. I also like infill small-bay industrial, which was overlooked for many years. Some secondary markets are starting to do well, because of the lower cost of land or because the distribution network has changed. We like Phoenix, Dallas, Southern California, Reno, the Pacific Northwest, and the Pennsylvania–New Jersey markets. Miami has just been on fire.
Will Strong: First, there’s more activity from a leasing perspective in most places. In the last three weeks, I’ve been to New York, Dallas, Chicago, and Denver, and I’ve probably met with the top 50 investors in the country. Most of them were feeling more bullish on leasing overall—not all of them, but a surprisingly large [number] were really more optimistic about the fundamentals. I would say the word is hopeful, despite concerns about what’s going on with trade and tariffs. Second, our debt team is incredibly busy. Debt is plentiful and available. Third, if you’re selling something with really good credit, quality, or location, there’s a good market for that right now. Fourth, people are starting to reach out to us about development in certain places and segments. And fifth, at the portfolio sale level, if you’ve got quality assets in quality locations, it feels like there’s some strength in selling portfolios.
Adam Herrin: We focus on population trends, major infrastructure investments, and places where meaningful transportation and logistics trends are occurring or are about to occur. We are very bullish on Texas and Arizona, particularly Dallas/Fort Worth, Houston, and Phoenix. There’s a lot of tech, manufacturing, assembly, and logistics-related activity happening in those markets. In terms of property types, we’re a shallow- and mid-bay focused developer, because that’s where the bulk of the leasing activity has occurred, year after year, in every market in America. However, we do occasionally build big boxes if the site/market warrants it.
Austin Maddux: Foundry Commercial’s footprint is in the growth markets of the United States, the Southeast, and Texas. These markets have experienced significant population growth over the past five years, which has in turn driven industrial growth. Despite this growth, we have seen both overbuilding and a lack of demand in the larger industrial buildings, particularly in perimeter areas around the core markets. Buildings targeting 200,000-square-foot (18,580 sq m) and larger users in these areas have suffered the most. We have avoided these areas in favor of smaller, infill locations, targeting users under 200,000 square feet and, particularly, users smaller than 100,000 square feet (9,290 sq m). Infill locations are, by definition. harder to obtain. Our focus in this area has been demolishing obsolete office buildings and replacing them with new, modern industrial developments. We have successfully converted eleven offices into infill industrial.
What’s the biggest challenge these days in bringing new industrial projects to market?
Herrin: The most obvious challenge is competition. There have never been more industrial developers, owners, and operators in America—or in the world, for that matter—than at this time. That has made it incredibly difficult to get to places and get the opportunities before other people do. The second challenge is municipalities. Numerous municipalities don’t understand the benefits of the job creation, employment base, and tax base that our projects create. There’s a lot of misperceptions that creep in when we start to rezone a site or present a potential multibuilding business park to a municipality. Some cities are eager to have industrial development, others are not.
Maddux: Our focus is on smaller, single-phase, infill industrial developments. Depending on the location—particularly if it is close to existing residential—the neighbors will oppose the project out of a fear of congestion caused by trucks. In most cases, we are tearing down office buildings, so you have to displace the existing tenants. [Such] factors combined make redevelopment efforts like these not for the faint of heart. Most municipalities understand the realities of the choices they are facing: Do they maintain a failed use that reduces the tax basis and can become an eyesore in the city, or do they accept the redevelopment to avoid the blight and the loss of tax revenues? In addition, careful traffic planning can [reassure] residents that their quality of life will be minimally impacted.
Strong: Capital is following fundamentals right now—the supply and demand of users, the tenants and the leasing supply-demand balance, the oversupply of buildings. It’s tough to determine rental rates right now in most places, which creates challenges. We’re on the other end of a cycle where we had all this development, then the cycle came to an end, and now that development is getting leased up, so it’s hard to determine what these lease rates should be. Also, deal size matters. The size of the deal has got to be right for the market that it’s in.
Achtemeier: It’s incredibly hard to get entitlements, permits, and approvals. There are a lot of political and legislative issues that make it challenging. Getting enough power to the site is becoming a bigger issue. More industrial tenants need extra power—maybe they’ve got some slight data center edge, or are bringing in light manufacturing. Power, entitlements, and labor are all major factors.
How are AI and other technologies changing the industrial sector?
Maddux: We are not yet seeing AI impacting either the demand for—or configuration of—industrial space, other than [through] the competing demand for land and power from data centers. That does not mean . . . it will happen—it is just not happening yet. Goods are goods, and [they are] hard to replace with AI. The technologies most likely will impact the speed and efficiency with which goods are moved.
Strong: We’re using AI every day. From a marketing perspective, we’re tracking bid activity and pricing levels, using it to understand valuations and pricing and buyers and capital flows. We’re real estate brokers, so we really care about where capital is coming from [and make] sure we’re being smart about cost of capital, what their return thresholds are, who’s moving capital across the country and internationally. We’re using it analytically to track bid activity. There’s new capital coming from all over the place, and AI is helping us identify where it’s coming from. On the investor side, at the institutional level, lots of clients are using AI to determine rents and tenant behavior.
Achtemeier: We’re seeing a lot of things get more automated, with more robotics. We’re working on a 1.2-million-square foot (111,480 sq m) e-commerce facility, and [it] had three levels full of robotics and spent an enormous amount of money—something you wouldn’t have seen even three or four years ago. We’re also starting to see some crossover between industrial investors and data center investors on sites that could go either way, if you can get the power. Many long-term industrial investors are either actively investing in data centers or considering it.
Herrin: Technology has had a huge impact on our sector. First, there’s a significant amount of semiconductor and data center–related themes happening within Texas and Arizona that has created a huge need for industrial product, mainly from suppliers that are providing goods and services for those AI-related growth areas. A good example is the Taiwanese plant in North Central [EH1] Phoenix. Granted, this is not purely AI-related, but there’s huge demand for semiconductor-related products, and that has had a spin-off effect with other suppliers and AI-related businesses. The other area is within the businesses that operate [on[EH2] [RN3] ] our properties. The automation and robotics . . . occurring—AI has had a significant impact there, and there’s a significant amount of investment going into that space.
What are tenants looking for?
Achtemeier: Excess land for extra trailer or car storage, circulation, secured yards, staging areas, and sorting is at a premium right now. Everyone used to build larger buildings with a 50 percent coverage ratio. That’s gone down dramatically. Some companies have larger trucks, as well as semis and vans, so the excess land for flexibility on a site plan is really important. Access to transportation systems, power, and labor is really key. Functionality is what matters most—and access to the customers and population base.
Herrin: A lot of the major components of our buildings are still very much in vogue: ample trailer storage, clear heights, building efficiencies, more dock doors than ever. We’re starting to see a real trend towards quality of life for the businesses that operate within our buildings. If we can incorporate greenspace within our business parks, we are seeing high demand among businesses that want to enhance the quality of life for their employees.
Maddux: We are seeing demand today primarily in the users servicing or delivering to a more limited trade area. We are not yet seeing significant increases in demand driven by onshoring or reshoring, although we are seeing some early looks.
What other trends are you excited about?
Strong: It feels like we’re as busy as we’ve ever been in terms of volume. Industrial is a great space to be in long term. The majority of groups I’ve been visiting are deploying capital. When there’s volatility in the market, usually someone’s on the sidelines, or everyone’s got a different theory on how they want to time acquisitions or dispositions. But right now, it feels like the overwhelming [number] of people we met with were looking to deploy money and find assets to buy.
Herrin: First, the amount of capital that’s pursuing industrial has surprised me, and a lot of people. There’s a flavor of capital for every type of investment within industrial, across the risk spectrum—speculative development, value-add investments, and more core investments. The second trend is the amount of manufacturing that’s occurring. Nearshoring and onshoring is real, and it’s happening. We have a 50-acre (20 ha) site in El Paso, across from the Ysleta-Zaragoza Bridge, and the amount of manufacturing activity we’re seeing from foreign companies is pleasantly surprising. That’s occurring throughout Texas and Arizona, and I think we’re going to see that for many years to come, given what’s happened with infrastructure legislation, as well as the logistical disruptions that happened as a result of Covid.
Maddux: We remain bullish on replacing vacant or lower-quality office product with infill industrial developments, particularly in infill locations. With most of the obvious locations already converted, each new possibility seems harder than the last. Nonetheless, these are the sizes and locations that tenants desire. Ultimately, an infill user must balance the cost of trucks and drivers on the roads against locations closer to their customers—and proximity to the customers is winning, today. Delivering compelling risk-adjusted returns begins with accurately forecasting future supply and demand fundamentals. We remain bullish on developing infill warehouse assets tailored to the most active and durable segment of tenant demand—what we view as the core of the leasing market—particularly along the I-35 East and I-35 West corridors within the DFW Metroplex.
Achtemeier: E-commerce is going to continue to drive demand in major markets and [in] select secondary markets—it’s still in its infancy. I think you’ll see more advanced manufacturing within the industrial sector. Small-bay users are coming back for smaller businesses, as well. I’m very excited about data center growth. Even though we’ve had some headwinds with industrial vacancies increasing and industrial rents stalling out a little bit, rents are still much higher than they were historically. It’s going to continue to be a good asset with very good performance for both investors and lenders.
[EH1]Sic? Capped?
[EH2]Right?
[RN3]Yes.
