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If you've ever wondered about what industrial real estate is, the different types of industrial spaces, the factors driving its demand, and the future of this sector, you've come to the right place. Industrial real estate refers to commercial properties specifically designed and used for industrial activities such as manufacturing, storage, distribution, and research and development. While different areas of the Triangle are experiencing distinct industrial real estate trends, there's no doubt that it's an important segment having a significant impact on our local economy.

Importance of Industrial Real Estate

Emilee Collins, CCIM

Industrial real estate properties are essential for the functioning of various industries and play a crucial role in the economy. Pickett Sprouse Commercial Real Estate Broker Emilee Collins, CCIM focuses on the industrial sector. She explains, "They're hubs where goods are made, stored, sorted, and distributed. In other words, they allow businesses to operate efficiently out of spaces that are tailored to meet their needs." The demand for industrial properties is influenced by factors such as the growth of e-commerce, increased manufacturing activities, and the need for storage and distribution facilities. That's why the sector plays such a pivotal role in supporting supply chains and facilitating trade.

According to Emilee, "By continuing to invest in industrial real estate, our country is able to stimulate job creation and increase payroll value." Here in the Triangle, she notes that "This sector has a significant impact on the number of jobs supported, personal earnings, and direct spending when considering the operations of the buildings, soft costs, site development, hard costs, and tenant improvements."

Types of Industrial Property

There are different types of industrial real estate properties that cater to specific industrial needs. These generally include warehouses and cold storage facilities, distribution centers, and manufacturing facilities. Like most types of commercial real estate, industrial properties are categorized into Class A, B, and C. Emilee explains how they are classified. "Class A industrial facilities are the newer buildings that are well-located, have sufficient on-site parking, have incorporated high ceilings, plentiful truck docks, have high power capacity, and are generally more modern in design. Class B properties and Class C industrial spaces are older buildings without the attributes of Class A buildings and that may have been designed for a specific user's needs and won't be able to meet the needs of other users without extensive renovation."

Key Features of Industrial Properties

Industrial properties have certain qualities that make them perfect for industrial activities. Emilee describes some of the most common features of each type of industrial building.

  • Manufacturing facilities: May have high power requirements and specific floor plan designs to efficiently bring in their raw products to assemble into a finished product.
  • Distribution centers: Benefit from a significant number of dock doors and larger truck courts for the high volume of trucks moving inventory or packages to and from the facility.
  • Warehouse and cold storage facilities: May have high ceiling heights to accommodate tall racking systems which maximizes the amount of inventory or product they can store or move through their facility.

Generally, industrial real estate is located in areas that have close proximity to interstates or major highways and that have the utility infrastructure needed for the operation such as electricity, gas, water, and sewer. These areas have been zoned for light or heavy industrial purposes, with a buffer from residential properties. The road infrastructure, including traffic lights and intersections, has been designed or altered to accommodate larger trucks and a higher volume of employee traffic. The buildings themselves may have wider column spacing, 25+ feet ceiling heights, truck height loading docks, sprinkler systems, and heavy power capacity.

Factors Driving Demand for Industrial Real Estate in the Triangle

There are several primary factors driving the demand for industrial real estate in the Triangle.

Growth of E-Commerce and Demand for Next-Day Delivery

The growth of e-commerce and the demand for next-day delivery has led to an increased need for distribution centers and last-mile delivery facilities. E-commerce companies require distribution centers and fulfillment centers to store and ship products efficiently. Emilee notes that "The pandemic greatly accelerated the requirement for facilities to be located at intervals to meet the demands of online orders while many were at home and not physically venturing out to retail outlets."

Just-in-Time Inventory Management

Just-in-time inventory management has also been a focus in order to keep as little inventory on hand as possible and to quickly adjust to shifts in customer needs. Just-in-time inventory management, also known as lean manufacturing, is a strategy that focuses on minimizing waste by receiving goods only as they are needed in the production process. This approach reduces the need for large warehouse spaces to store large amounts of inventory, but companies do require small-to-midsize, more efficient warehouse spaces located close to their manufacturing facilities. According to CoStar's Third Quarter Industrial Market Report for Durham, "Durham's industrial market has some notable differences from other southeastern industrial markets. Midsize industrial spaces are more common in Durham than in North Carolina's port-centric markets and inland distribution hubs such as Charlotte, and Durham's developers have delivered fewer big-box distribution centers."

Reshoring

"Lastly," Emilee says, "In an initiative to bring more manufacturing back to North America (reshoring), there's now a need for more buildings to meet the demand." Growth in certain sectors like electric vehicles, battery production, and computer chips are helping to drive this demand - especially here in the Triangle. CoStar forecasts that "The electric vehicle and battery manufacturing and suppliers will become a major part of the market after the announcements of major facilities by VinFast in Chatham County and Toyota in Greensboro."

Investment and Development in Industrial Real Estate

The industrial market presents attractive real estate investment opportunities for investors. The steady demand for industrial space, coupled with the potential for rental income and capital appreciation, continue to make it an appealing asset class - despite variations within the Triangle's markets.

Durham Industrial Real Estate Market

According to CoStar, "The high demand for industrial space comes as Durham and the broader North Carolina Research Triangle continue to outpace the United States in terms of both population growth and economic growth." This is in large part due to our region's large base of biotechnology, life science, and pharmaceutical companies, all significant users of industrial space, as well as e-commerce and other distribution operations, "particularly toward the west side of the metro, along interstates 40 and 85."

An article on the I-85 corridor in Southeast Real Estate Business's November 2023 issue agrees with that assessment. "The corridor's top industrial markets benefit from business-friendly state and local legislatures, legacy labor pools, developable land with few barriers to entry and population growth."

This high demand has been keeping developers in the industrial sector busy in 2023 with CoStar reporting that 2.7 million square feet of new inventory was delivered in the Durham market since the fourth quarter of 2022. That, in turn, has caused vacancy rates to go up slightly, although industrial tenants are still paying well above the historical average rents in the market.

Raleigh Industrial Real Estate Market

On the flip side, CoStar reports that "the Raleigh industrial market continues to cool because of both below-average net absorption and above-average new deliveries." Despite that, construction activity in the market has been high with 3.5 million square feet of new inventory having been delivered in Raleigh since fourth quarter of 2022.

Emilee notes that while demand is still strong in the Triangle overall, "A cooling has occurred in the industrial real estate sector as e-commerce sales have decreased, interest rates have increased, and companies like Amazon are holding off on their expansion plans." She says that this cooling makes it even more important for speculative developers who are thinking about their investment strategy to weigh the shell features they plan for the building. Considerations should include determining if high-power capacity to future-proof some users' needs is necessary as well as whether to invest in outdoor green space amenities, natural lighting, and other items that may be appealing for employees.

The Future of Industrial Real Estate in the Triangle

Overall, the future of industrial real estate in the Triangle looks tempered compared to recent years but still promising. CoStar forecasts that in Raleigh, "demand will remain positive, but only about 35% of under-construction space is preleased, and with so much new product under construction, vacancies in Raleigh are likely to continue rising in the near term as the new product delivers. After the majority of speculative projects now under construction are delivered over the next six to 12 months, Raleigh's industrial vacancy rate could easily stabilize or begin tightening again."

In Durham, CoStar says that the market's "robust pipeline of 3.0 million SF means that even though absorption is forecast to remain relatively high, vacancy is likely to tick up slightly as new product delivers."

Emilee sees companies "continuing to adapt and evolve, innovating their operations, technologies, and automation with the goal of increasing efficiencies as well as offsetting difficulties caused by labor shortages." This means that they are going to be looking for advanced equipment in their industrial spaces that provide for the efficient loading and unloading of containers and trailers. Emilee says this type of equipment is needed "in order to handle the loads from our regional ports and reduce damage to the products."

The Bottom Line on Understanding What Industrial Real Estate Is

The bottom line on industrial real estate is that it plays a crucial role in the economy by providing spaces for industrial activities such as manufacturing, storage, and distribution. It is in this role that the sector helps to drive economic growth and facilitate the flow of goods and services throughout the economy. Without industrial real estate, businesses would struggle to operate efficiently and effectively, leading to potential supply chain disruptions and reduced productivity. The past few years have certainly spotlighted the importance of this sector, making it one of the most vital asset classes in our current economy.

To find out more about industrial real estate investing in the Triangle, reach out to marketing@pickettsprouse.com and mention this article.

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