The U.S. industrial property market is on track for another record year in 2016, and the market could expand well into 2018 despite the possibility of higher interest rates that would increase the costs of carrying inventory, according to a leading industrial real estate and logistics firm.
JLL Inc.'s optimistic longer-term outlook for industrial demand and pricing goes beyond earlier projections by other real estate and logistics consultancies, which said the market would cool in 2017 as abundant new supply comes online to satisfy what has been a multiyear surge in demand. Richard H. Thompson, JLL's international director, supply chain and logistics solutions, said demand will be powered by the dramatic growth of e-commerce and the fulfillment networks developed and expanded to support it. E-commerce accounts for only 8 percent of all U.S. retail sales, according to JLL estimates. (Other estimates are somewhat higher than that.) That figure will undoubtedly rise as traditional retailers begin shifting massive resources that were once reserved for brick-and-mortar investments to the digital world.
Through the end of the third quarter, the national vacancy rate stood near all-time lows, at 5.8 percent, despite additional supply being delivered to the market, JLL estimated. Net absorption, which measures the amount of space occupied at the beginning and end of a reporting period, has been in solidly positive territory for the past few years, signaling that strong demand continues to absorb available square footage.
As of the end of the third quarter, JLL said that all of the top 50 industrial markets it surveys were experiencing either "peaking" or "rising" conditions.
Capitalization rates, which represent the ratio of an industrial property's value to the operating income it generates, will compress at a modest rate, meaning buyers will continue to pay more for space that generates the same amount of income, JLL said. For top-rated "Class A" properties, the widening spread between the so-called cap rate and yields on long-term Treasury bonds will allow for ongoing cap-rate compression, the firm said.
In virtually every market except for southern California and Seattle, where demand has been nearly off the charts and vacancies are in the low single digits, industrial portfolios can be acquired at cap rates of between 5 and 6.5 percent, according to JLL figures. As of Friday, the yield on the 30-year Treasury bond stood at 2.46 percent.
In addition, an absence of portfolio acquisition activity so far this year has left large amounts of capital on the sidelines that could potentially be committed to industrial property, JLL said. The sector's record performance in 2015 was capped by more than $20.5 billion in transactional activity in the fourth quarter, the best quarter for total closing volumes in history, according to the firm
In a presentation made late last month at the Council of Supply Chain Management Professionals' (CSCMP) annual meeting in Orlando, Kris Bjorson, JLL's international director retail/e-commerce distribution, said the strongest relative growth for 2016 will be in markets like Denver, Salt Lake City, and San Antonio. Those areas are not normally considered first-tier industrial property centers like southern California's Inland Empire east of Los Angeles, eastern Pennsylvania, and Indianapolis. This reflects the desire of traditional retailers and e-tailers to build fulfillment centers nearer to end markets so product fulfillment and delivery can be executed more rapidly, Bjorson said.
In May, Chicago-based real estate services giant Cushman and Wakefield projected a 5.9-percent industrial vacancy rate by year's end, on par with levels not seen in 30 years, and well below the 10-year average. The firm said at the time that an uptick in construction activity in 2017 would help to alleviate some of the space shortages.
The industrial market collapsed along with the rest of the U.S. economy during the Great Recession, but began recovering around 2011 and has been gaining steam ever since.
The market's current growth cycle will dovetail with what will likely be a period of rising interest rates. The Federal Reserve dropped the rates on federal funds—the interest on overnight loans between member banks—to near zero during the 2007-08 financial crisis that precipitated the recession. Since that time, the Fed has raised rates just once, a quarter-percentage-point increase last December. However, there is an emerging consensus it will be do so again this December, and many market participants believe more rate increases are in the offing. That's because the Fed is looking to normalize rate conditions as the U.S. economy improves in an effort to stop inflation before it can take root.
Businesses in 2015 experienced, on average, a 5.1-percent rise in inventory-carrying costs due to higher capital costs, according to the most recent annual "State of Logistics Report," which was written by the consulting firm A.T. Kearney for CSCMP and was presented by Penske Logistics. At the same time, the report found that business inventories—which had grown steadily at approximately 5 percent per year between 2009 and 2014—flattened out in 2015 due to sluggish domestic demand and a slowdown in exports, a byproduct of a strengthening U.S. dollar.
Businesses today have costlier inventory loads to finance than at any time in years, the report found. In 2009, inventory value stood at $1.93 trillion. At the end of 2015, it stood at $2.51 trillion, according to the report's data. However, the Kearney analysts said the data point to an inventory correction, not a more widespread problem such as a recession.
"Rents have been rising faster than interest rates and are at a level that justif(ies) new construction in most markets, so the concern of rising rates hasn't been an issue," said Jeffrey Havsy, chief economist in the Americas for Los Angeles-based real estate services giant CBRE Inc. "Rising rates are lower on the list of concerns for industrial developers."
Online merchants should consider seven key factors about American consumers in order to optimize their sales and operations this holiday season, according to a report from DHL eCommerce.
First, many of the most powerful sales platforms are marketplaces. With nearly universal appeal, 99% of U.S. shoppers buy from marketplaces, ranked in popularity from Amazon (92%) to Walmart (68%), eBay (47%), Temu (32%), Etsy (28%), and Shein (21%).
Second, they use them often, with 61% of American shoppers buying online at least once a week. Among the most popular items are online clothing and footwear (63%), followed by consumer electronics (33%) and health supplements (30%).
Third, delivery is a crucial aspect of making the sale. Fully 94% of U.S. shoppers say delivery options influence where they shop online, and 45% of consumers abandon their baskets if their preferred delivery option is not offered.
That finding meshes with another report released this week, as a white paper from FedEx Corp. and Morning Consult said that 75% of consumers prioritize free shipping over fast shipping. Over half of those surveyed (57%) prioritize free shipping when making an online purchase, even more than finding the best prices (54%). In fact, 81% of shoppers are willing to increase their spending to meet a retailer’s free shipping threshold, FedEx said.
In additional findings from DHL, the Weston, Florida-based company found:
43% of Americans have an online shopping subscription, with pet food subscriptions being particularly popular (44% compared to 25% globally). Social Media Influence:
61% of shoppers use social media for shopping inspiration, and 26% have made a purchase directly on a social platform.
37% of Americans buy from online retailers in other countries, with 70% doing so at least once a month. Of the 49% of Americans who buy from abroad, most shop from China (64%), followed by the U.K. (29%), France (23%), Canada (15%), and Germany (13%).
While 58% of shoppers say sustainability is important, they are not necessarily willing to pay more for sustainable delivery options.
Gulf Coast businesses in Louisiana and Texas are keeping a watchful eye on the latest storm to emerge from the Gulf Of Mexico this week, as Hurricane Rafael nears Cuba.
The category 2 storm’s edges could also brush Florida as it heads northwest, causing tropical storm force winds in the lower and middle Florida keys. However, the weather agency said it is too soon to forecast Rafael’s impact on the U.S. western Gulf Coast.
In the face of campaign pledges by Donald Trump to boost tariffs on imports, many U.S. business interests are pushing back on that policy plan following Trump’s election yesterday as president-elect.
U.S. firms are already rushing to import goods before the promised tariff increases take effect, to avoid potential cost increases. That’s because tariffs are paid by the domestic companies that order the goods, not by the foreign nation that makes them.
That dynamic would likely increase prices for U.S. consumers as importers pass along the extra cost in the form of price hikes, according to an analysis by the National Retail Federation (NRF). Specifically, Trump’s tariff plan would boost prices in six consumer product categories: apparel, toys, furniture, household appliances, footwear, and travel goods. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said in a release. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The rush to avoid those swollen costs can already be measured in the form of rising rates for transporting ocean freight, as companies start buffering their inventories before the new administration officially announces tariff hikes. Transpacific rates are still $1,000/FEU or more above their April lows, showing increased ocean volumes and climbing rates generated by shippers’ concerns about supply chain disruptions including port strikes and the Trump tariff increases, supply chain visibility provider Freightos said in an analysis. "The Trump win may start shaking up supply chains even before he takes office. Just the anticipation of higher tariffs may lead importers to pull forward shipments, creating a preemptive freight frenzy," Judah Levine, Head of Research at Freightos, said in a release. “Frontloading will cause freight rates to feel the heat as importers race to dodge the extra costs, similar to what took place with Trump’s tariffs on Chinese goods in 2018 and 2019."
Another group sounding a note of caution about international trade developments was the Global Cold Chain Alliance (GCCA), a trade group which represents some 1,500 member companies in more than 90 countries that provide temperature-controlled warehousing, logistics, and transportation. “We congratulate President Trump on his election. We also congratulate all those who have been elected to the U.S. Senate and House of Representatives,” GCCA President and CEO Sara Stickler said in a statement. “We are also committed to promoting the growth of exports from U.S.-based food production and broader manufacturing sectors. We will engage constructively in the policy discussion about future trade policy and continue to make the case for the importance of maintaining balanced and resilient trade routes for food and other temperature-controlled products across the world.”
Businesses in the European Union (EU) were likewise wary of tariff plans, judging by a statement from the VDMA, a trade group representing 3,600 German and European machinery and equipment manufacturing companies. "Donald Trump's second term will be a greater challenge for German and European industry than his first presidency. We must take his tariff announcements seriously, in particular. This will once again put a noticeable strain on transatlantic trade and investment relations," VDMA Executive Director Thilo Brodtmann said in a statement. “The USA is and will remain the most important export market outside the EU for mechanical and plant engineering from Germany. Our companies offer the products required to implement the re-industrialization of the USA that Donald Trump is striving for. The VDMA's overall outlook for the American market therefore remains positive."
In addition to its flagship Clorox bleach product, Oakland, California-based Clorox manages a diverse catalog of brands including Hidden Valley Ranch, Glad, Pine-Sol, Burt’s Bees, Kingsford, Scoop Away, Fresh Step, 409, Brita, Liquid Plumr, and Tilex.
British carbon emissions reduction platform provider M2030 is designed to help suppliers measure, manage and reduce carbon emissions. The new partnership aims to advance decarbonization throughout Clorox's value chain through the collection of emissions data, jointly identified and defined actions for reduction and continuous upskilling.
The program, which will record key figures on energy, will be gradually rolled out to several suppliers of the company's strategic raw materials and packaging, which collectively represents more than half of Clorox's scope 3 emissions.
M2030 enables suppliers to regularly track and share their progress with other customers using the M2030 platform. Suppliers will also be able to export relevant compatible data for submission to the Carbon Disclosure Project (CDP), a global disclosure system to manage environmental data.
"As part of Clorox's efforts to foster a cleaner world, we have a responsibility to ensure our suppliers are equipped with the capabilities necessary for forging their own sustainability journeys," said Niki King, Chief Sustainability Officer at The Clorox Company. "Climate action is a complex endeavor that requires companies to engage all parts of their supply chain in order to meaningfully reduce their environmental impact."
Supply chain risk analytics company Everstream Analytics has launched a product that can quantify the impact of leading climate indicators and project how identified risk will impact customer supply chains.
Expanding upon the weather and climate intelligence Everstream already provides, the new “Climate Risk Scores” tool enables clients to apply eight climate indicator risk projection scores to their facilities and supplier locations to forecast future climate risk and support business continuity.
The tool leverages data from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) to project scores to varying locations using those eight category indicators: tropical cyclone, river flood, sea level rise, heat, fire weather, cold, drought and precipitation.
The Climate Risk Scores capability provides indicator risk projections for key natural disaster and weather risks into 2040, 2050 and 2100, offering several forecast scenarios at each juncture. The proactive planning tool can apply these insights to an organization’s systems via APIs, to directly incorporate climate projections and risk severity levels into your action systems for smarter decisions. Climate Risk scores offer insights into how these new operations may be affected, allowing organizations to make informed decisions and mitigate risks proactively.
“As temperatures and extreme weather events around the world continue to rise, businesses can no longer ignore the impact of climate change on their operations and suppliers,” Jon Davis, Chief Meteorologist at Everstream Analytics, said in a release. “We’ve consulted with the world’s largest brands on the top risk indicators impacting their operations, and we’re thrilled to bring this industry-first capability into Explore to automate access for all our clients. With pathways ranging from low to high impact, this capability further enables organizations to grasp the full spectrum of potential outcomes in real-time, make informed decisions and proactively mitigate risks.”