Focus on Industrial Rather Than Office, and See a Different Future

I read over the weekend that Morgan Stanley analysts “forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.” Now, I'm not an economist, but I am a real estate lawyer who went through the Great Recession, and that's plain nuts. Yes, office properties are on the ropes and, yes, when the average term for a commercial mortgage is 5 years, at any given time, a very large percentage will need to be renegotiated in the next 24 months. That said, using office properties to draw broader conclusions about the direction of commercial real estate is a mistake.  

If you focus on industrial rather than office, you see a different future. The industrial real estate market is expected to remain strong in the next two years, driven by the continued growth of e-commerce and the need for more warehousing and distribution space. According to a report by CBRE, demand for industrial space is expected to grow by 4.5% in 2023 and 4% in 2024. This growth will be led by the following factors:

The continued growth of e-commerce: E-commerce sales are expected to grow by 10% in 2023 and 9% in 2024. This growth will require more e-fulfillment centers are warehouses that are specifically designed to handle the processing and shipping of online orders. This trend will only continue to grow, as more and more businesses move their operations online.

The need for more last-mile delivery space: As e-commerce sales continue to grow, there will be a need for more last-mile delivery space. This is the space that is used to store and deliver goods to customers' homes.

The rise of omnichannel retail: Omnichannel retail is the practice of selling goods through both brick-and-mortar stores and online channels. This trend is growing, and it will require more industrial space to store goods for both channels.

The rise of automation in the warehouse: Automation is increasingly being used in warehouses to improve efficiency and productivity. This trend is creating demand for more industrial space to house automated equipment.

The growth of 3PLs: Third-party logistics (3PLs) companies are businesses that provide warehousing, distribution, and other logistics services to other businesses. The 3PL market is growing, and this is creating demand for more industrial space.