Connect CRE recently hosted our Connect Industrial Midwest 2024, which gathered leaders from across the industrial real estate spectrum to discuss what’s happening now and what the future holds in store.

David Lockwood, SIOR, CCIM, CRE, is Executive Vice President and COO of Colliers International South Carolina and the SIOR Global President, answered some of our questions about the current market dynamics and emerging opportunities.

Q: What factors have driven the exponential growth seen in industrial?

A: Ultimately, the industrial commercial real estate market is being driven by the rapid pace of consumerism. This increasing consumer demand means companies are building storage or distribution facilities closer to their delivery point. To meet this accelerating consumerism, we see companies planning distribution centers close to all delivery points. This also applies to the food industry and has led to a manufacturing increase, and these additional distribution facilities have been driving the expansion of the industrial market. Finally, the push for onshoring and reshoring manufacturing in the U.S. has contributed significantly to the growth of industrial production.  

Q: What are some challenges unique to industrial that are top of mind for developers?

A: Power is absolutely critical across the board, whether it is cold storage, data centers, or manufacturing. The availability of power and the grid’s capabilities and reliability are paramount. From a manufacturing standpoint and storage, success hinges on the ability to get the electric infrastructure, such as transformers and all necessary elements in place. This can mean a long lead time, and new projects are looking for where they can get that equipment delivered and ensure power reliability. The user is going to look at the availability of labor, power, facilities, and incentives. Increasingly, there has to be the ability to ensure there is a water source for production. Additionally, developers don’t want to face many obstacles, and if a business-friendly community or state offers a path of less resistance, that is attractive for new projects.

Q: Which regions are seeing the most activity? Are the areas of untapped potential that show promise for industrial development?

A: In the last 12 months, the absorption has been somewhat widespread, but we see the most activity in Southern California, Phoenix, Houston, and Dallas, as well as in the Gulf of Mexico region, Georgia, North Carolina, South Carolina, and Tennessee. Similarly, Ohio is a bright spot with many EV battery operations and vehicle manufacturing, and the whole Southern Sunbelt has been a hotbed of concentrated activity. Much of this is impacted positively by port activity, including the ports of Long Beach, the Gulf, and those on the East Coast; these all have major influences on the industrial market.

Q: We continue to see challenging economic headwinds in commercial real estate. How have some of those factors, such as higher interest rates, impacted the industrial sector?

A: Certainly, development has been significantly curtailed because it still requires debt on the properties. Until we see interest rates coming down and the money supply loosens up, we won’t be starting new projects at the pace that they were starting. We were seeing that in every sector, but obviously industrial is not immune. However, an interesting thing that’s a positive sign is that occupancy costs have not been an issue. The fact that a building may cost a dollar more per square foot because of a higher interest rate or because of the capital required hasn’t hindered the end user from paying because the need for the space is so great.

Q: What advice would you give on the outlook for industrial in the months to come?

A: There is still an incredibly promising future ahead. I classify what we have gone through over the past few years as mini-cycles. These are really short-term cycles where we had a complete stop, then supply chain issues, and then you had a lack of product followed by building a lot of product, and then we got rising interest rates. But in reality, these are all six-month mini-cycles, and we’re almost getting back to that normal level of activity.

This is absolutely fantastic for industrial brokers, and while there’s a very long runway ahead of us, with everything happening on the world stage and having more manufacturers back in the United States, the future is bright. Metaphorically, we’re at the starting line of a marathon. Brokers are projecting a strong second half of 2024 and an upswing into next year, contingent on seeing some relief from the interest rates. Add to that the factor of an election year, which is something that historically can lead to trying to lower interest rates and spur on the economy. Most likely, we will simply plod along in a good way and really start to see some exciting momentum in 2025. This is certainly a marathon, not a sprint.