Millennials and the Industrial Sector

The online shopping habits of the largest generational cohort in U.S. history are leading to new investment opportunities in the industrial sector, as retailers seek to shorten delivery times and improve logistics.  Investors are finding new opportunities in the industrial sector, thanks to the growing impact of millennials—those between the ages of 18 and 34, who make up the largest cohort in United States history. Their disruptive preferences are reshaping investment strategies in the residential and office sectors, and with e-commerce claiming a significant slice of the retail pie, new opportunities in the industrial landscape are emerging. Millennials have grown up with electronic devices, so online shopping is second nature. In the United States, it’s anticipated that 10 percent of all retail sales will be executed online by 2017, and double-digit increases are forecast for the near future. E-commerce transactions exceeded $300B in 2014, while the number of mobile shoppers is projected to reach 175M by 2016, up from 95M in 2012, according to eMarketer. Providing the industrial facilities to quickly get goods to consumers will require investment capital.

“E-commerce has changed the face of retailing, and e-retailers are competing to shorten delivery times,” says David Confer, an industrial portfolio manager at Clarion Partners. “New facilities are being built close to the urban centers where millennials want to live, bridging the ‘last mile’ between merchandise and consumer.” Many e-retailers—particularly the biggest names—are beginning to rely on a combination of smaller, close-in distribution centers and large fulfillment centers in more remote, lower-cost locations. Fulfillment centers accommodate a greater number of employees, a huge product assortment, a higher return volume, and, increasingly, the use of robots. Newly constructed centers—typically build-to-suit projects—are often three times larger than traditional retail warehouses. But does this imply obsolescence for existing stock? “The demand for logistics facilities is very diverse,” says Chris Caton, senior vice president of research at Prologis. He points out that “there is a huge middle market, which is often overlooked. About 40 percent of all e-retailers, offering a wide variety of products, have annual sales of $5B or less.” E-commerce today accounts for just 10 percent of the retail pie, with an increase to 15 percent projected in the near future. Therefore, 85 percent to 90 percent of all retail sales will continue through traditional channels. Millennial preferences have indeed created opportunities for industrial investors. New facilities will be required to accommodate the growing e-commerce sector. But tenants of all sizes and business models require space; they are leasing both new and existing facilities and adapting space to their unique requirements. The opportunities for industrial investors are plentiful and attractive.