The COVID-19 pandemic changed all our worlds two years ago this month when full-scale shutdowns weighed heavily on the economy and Americans recalibrated their approaches to work and life. Since then, industrial real estate has continued to shine as commercial real estate’s darling – fueled by soaring demand, rising rental rates, and record levels of investment and development activity.

Industrial real estate professionals from across North America will gather in Long Beach, California, on March 23-24, for NAIOP’s industrial conference. Keynote session panelist Dwight Merriman, Partner and Head of Industrial in the Real Estate Group of Ares Management Corporation, sat down with Connect CRE to preview his keynote session: an executive outlook on the future of industrial real estate.

Merriman says the “intense demand” over the last 24 months was real but doesn’t see the jump in industrial demand as entirely COVID-19 related. That being said, a key driver that has been brought on by the pandemic’s disruptive impact to global supply chains has been the shift in tenant behavior from ‘just-in-time’ to ‘just-in-case’ as many have sought to ensure inventory resiliency. Having lived through many cycles in his 38-year career, Merriman notes, “All real estate must navigate through recessionary cycles. Industrial has gone down before, but it typically drops the least and bounces back the fastest. That’s because it’s a necessity-based product, and it plugs the hole in the global supply chain.”

Supply chain concerns have plagued the globe since COVID-19 began, hitting an apex in the 2021 holiday season, but Merriman sees the market fundamentals as strong and well poised for future growth. “At this point, values and rental rates are incredibly high. For example, according to research by Green Street, industrial rental rates jumped 17% in 2021. The expectation for 2022 is a 13% increase in the key coastal regions. Further, vacancy rates remain low, and construction is in check.”

Looking to the future, Merriman points out that he expects the industrial real estate market to remain on a strong trajectory. He believes that opportunities exist for continued growth in new techniques, technologies and in infrastructure outside of commercial real estate. For example, Merriman noted that automating of ports would dramatically increase the efficiency in throughput from the ship to the warehouse. He also believes that single-story properties will continue to dominate the industrial landscape and that for the foreseeable future, the ability to expand will require more land to grow the industrial stock.

One trend Merriman notes, however, is key: clear heights. In the 1980s, 24-foot clear heights were standard, shifting to 28 feet in the 1990s, and between 32- and 36-foot clear in the 2000s,. Now, effective bulk distribution occupiers are demanding up to 40-foot clear. E-commerce businesses are the ones predominantly demanding the higher clearances, as well as the incorporation of storage mezzanines in facilities. These higher clearances and storage mezzanine levels allow for the use of robotics – a trend being implemented by e-commerce giants, though the industry is not seeing smaller distributors seek those options as widely yet. Additionally, Merriman suggested that wider truck courts and trailer storage, which also provide a lot of efficiency for the user, have become the new norm for bulk industrial building.

Outside of the warehouse, for industrial to continue to thrive, America’s infrastructure needs to catch up to the growth and expansion experienced in the e-commerce sector. “The industrial real estate market will benefit from improved infrastructure, including wider roads, more rail service and automated ports. While it may take time for those improvements to be made, it is unlikely that the delay will decrease demand. Consumers are still expected to drive demand for goods and services and slower delivery times should not be a roadblock to initial demand,” concludes Merriman.

Find out more about the future of industrial at NAIOP’s I.CON West event in Long Beach, California, March 23-24, at this LINK.