Citi Global Wealth UNSToPPABLe TreNDS | | 75 Investments Identifying markets with favorable supply and three times the warehouse space of traditional will be required globally over the next five years 9 14 demand fundamentals and strong demographic retail. Each 1% increase in e-commerce sales as to support the growth of internet sales. tailwinds will be critical, as increased financing a proportion of overall retail sales is expected to costs may impact the profitability for both new result in over 65 million square feet of demand Like multifamily, the industrial sector has held developments and existing assets with near- for industrial space. E-commerce demand has up well amid inflation. Rent growth within term debt maturities. particularly increased the need for larger, more logistics has outpaced inflation due to strong sophisticated and centrally located distribution tenant demand and to the shorter lease terms centers to enhance “last-mile” facilities for – typically 3-5 years – which has allowed rental Enabling the e-commerce same-day or next-day delivery. This will continue rates to keep pace as the current market 10 rate adjusts. revolution to be the case in 2023. With demand outpacing supply, overall US Despite higher interest rates, US commercial E-commerce took a great leap forward during vacancy rates are historically low at below capitalization rates continued to edge down the pandemic. With restrictions on in-person 4%.11 across industrial property types in the The US industrial real estate sector – shopping, consumers pivoted to ordering more which includes storage and distribution as well second quarter of 2022, hovering around 15 goods online. These habits have stuck: US as manufacturing, production and research 5.1%. Capitalization rates are measured as a e-commerce sales grew 32% year-on-year in & development facilities – remains strong property’s net operating income, expressed 2020, 14% in 2021 and 9% between the first and stable. as a percentage of the property’s value. In and second quarters of 2022.6 2023, industrials’ capitalization rates may And they are forecast to grow at 10% to 15% annually after Industrial properties’ overall availability rate rise, but its stability to date speaks for the the pandemic, gaining more market share from dropped by 60bps in 2022 in the US compared sector’s resilience. 7 to mid-year 2021 due to robust demand and brick-and-mortar stores. The same story applies globally, as e-commerce sales have increased a large amount of preleased construction The industrial market is not immune to increased 12 financing costs nor to slowing growth. But while 133% over the past five years, and 46% in the completions – FIGURE 2. Year-on-year rent first two pandemic years of 2020 and ‘21.8 13 the outsized e-commerce growth over the last growth surpassed 21%. As much as 2.1 billion square feet (0.64 billion square meters) of two years may moderate, the long-term outlook While e-commerce may reduce the need for additional e-commerce-dedicated logistics space for the industrial sector remains positive. retail floor space, online transactions require 6 US Department of Commerce, as of Q2 2022 7 CBRE Global E-commerce Outlook, as of Q2 2022 8,14 CBRE Global E-commerce Outlook 2022 Update, June 2022 9 Prologis, as of Q3 2020 10 United States Industrial Outlook, Q2 2022, JLL Research 11 CBRE, “Global Real Estate Remains an Attractive Investment Despite Economic Headwinds”, August 31, 2022, https://www.cbre.com/insights/viewpoints/global-real-estate-remains-an- attractive-investment-despite-economic-headwinds 12 Crow Holdings, as of Oct 2022 13 United States Industrial Outlook, Q2 2022, JLL Research 15 Real Capital Analytics. Capital Trends: U.S. Big Picture. Q2 2022