Traditional wisdom suggests that the rapid growth of e-commerce would fuel sustained demand for warehouse and logistics space, keeping industrial real estate on a strong upward trajectory. However, new research from Deloitte presents a more nuanced outlook: even as e-commerce sales continue growing at double-digit rates, industrial property sectors—including warehouses, distribution centers, and flexible spaces—may struggle to maintain their previous growth momentum.
Moderation, Not Decline
The Deloitte report doesn't predict long-term decline for industrial real estate but identifies a potential inflection point where growth rates moderate. While e-commerce continues expanding, several factors are converging to restrain the sector's growth potential:
- Supply glut risks: The rapid expansion of industrial properties in recent years has significantly increased market supply, potentially creating oversupply in certain regions.
- Intensified competition: Growing numbers of companies entering the industrial real estate sector are squeezing profit margins.
- Rising capital costs: Higher interest rates and increased financing costs are creating heavier financial burdens for developers and operators, affecting investment decisions.
- Macroeconomic headwinds: Slowing economic growth may dampen overall demand for industrial space.
Data Shows Deceleration
Deloitte's U.S. economic team developed an industrial property demand forecasting model that projects demand will grow by 850 million square feet in 2023, reaching 14.8 billion square feet—equivalent to the combined real estate footprint of Atlanta and Salt Lake City. While demand continues expanding, the growth rate has clearly slowed.
The model indicates that while e-commerce sales growth will continue driving industrial property demand, rising vacancy rates and higher capital costs will restrain that growth. Additionally, anticipated U.S. economic deceleration in 2020 would negatively impact the industrial real estate market.
E-Commerce and Reverse Logistics
Despite these challenges, e-commerce remains a key driver of industrial property demand—not just through forward logistics but increasingly through reverse logistics (return processing). The report notes that online purchases have return rates three times higher than brick-and-mortar retail, requiring about 20% more space for returns management.
As e-commerce sales grow, return volumes will rise correspondingly, creating additional demand for industrial space optimized for reverse logistics operations.
Expert Perspectives
John D'Angelo, Deloitte's U.S. real estate sector leader, observes that market dynamics reflect fundamental supply-demand economics. Deloitte's research indicates that new industrial property supply is catching up with demand, while space utilization efficiency improvements and anticipated economic softening may cause demand to contract in the medium term.
Thomas Boykin, Deloitte's supply chain specialist, notes that e-commerce customers are increasingly concentrated in urban areas and demand faster, cheaper delivery. This requires more urban fulfillment centers to enable same-day or even same-hour delivery—whether through shared facilities or retailer-owned operations—increasing demand for urban industrial properties.
Emerging Trends: On-Demand Warehousing
The report highlights the growth of on-demand warehousing models, with platforms like Flexe and Flowspace aggregating underutilized industrial space to meet seasonal storage needs. This model improves space utilization while reducing occupiers' storage costs.
Regional and Segment Variations
Supply imbalances aren't uniform across markets. Emerging e-commerce hubs and transportation corridors that saw overheated investment may face oversupply, while urban last-mile facilities remain undersupplied. Vacancy rates—a key market health indicator—vary significantly by location and property type, requiring careful analysis.
Strategic Implications
Facing these market shifts, industrial real estate players should consider:
- Diversifying financing sources beyond traditional bank loans
- Developing specialized reverse logistics capabilities
- Investing in urban multi-story warehouses and automation
- Partnering with on-demand warehousing platforms
- Implementing dynamic pricing models
While e-commerce growth continues creating opportunities, industrial real estate stakeholders must navigate supply-demand rebalancing, cost pressures, and economic uncertainty through operational excellence and innovation.