There’s a “really good story to tell with industrial” according to panelists of I.CON Virtual 2020’s session on major trends driving industrial demand. While the entire commercial real estate industry decelerated as the global COVID-19 pandemic set in, the slowdown was brief for industrial real estate and each of the panelists agreed that acceleration is expected through the end of the year.
Pete Quinn with Colliers International, led panelists Alex Cantu, Colliers International; Jeff Greenwalt, Sansone Group; Brandi Hanback, Rockefeller Group; and Steve Schnur, Duke Realty, in a discussion on where they are seeing growth, challenges and opportunity.
We were all in a state of discovery 90-120 days ago, worried about rent collections and deferral agreements that have not been as prevalent as predicted. Construction stoppages impacted some markets, but largely have been lifted. Market activity remains strong and consumer spending is on the rise, resulting in incredible activity and confidence that businesses are getting back to normal.
From the capital markets perspective, there’s been consistent activity, particularly for institutional transactions and high-quality credit deals for companies like Amazon that are leasing space. The last two weeks have yielded high calls for valuations, some of which could be the result of a slightly paused market that is returning to more normal levels of activity.
Clearly e-commerce is gaining even more strength as ordering online – everything from groceries to pharmacy to home improvement supplies – dominates retail sales. Walmart announced a 74% increase in online sales growth, topped by Target’s growth of 141%. Demand spurred by the COVID-19 crisis lifted online grocery sales 24% month-over-month to $6.6 billion; that means around 43 million customers have shopped online for groceries since May 1.
So, with all the demand and the need to keep inventory close to the consumer, will we run out of industrial space?
The panelists agreed it’s unlikely, although what’s absorbed will likely be nearly equal to what’s delivered, and that will put pressure on an already competitive landscape. The good news is that while the industry as a whole essentially switched off at the start of the pandemic, switching back on can be nearly as fast.
Markets along the eastern seaboard, from Connecticut down to Georgia, are all expected to perform extremely well. Salt Lake City and Denver are positioned for long-term growth as they service the West Coast, as are demographic-driven markets like Charlotte, North Carolina, and Phoenix. Markets close to Mexico are positioned to benefit from eased cross-border trade as the United States-Mexico-Canada Agreement (USMCA) comes into force on July 1.
Companies that want to buffer against disruption and avoid lost sales due to lack of inventory may trade off higher warehousing costs to have goods in-hand, particularly durable goods (think sanitizing wipes!) that have been in demand.
Challenges do lie ahead. Stabilizing the supply chain, challenges in underwriting, and making assumptions for rent growth will be tough. How will the presidential election impact the industry and consumer confidence? For cap rates, the concern remains for what consumer buying power will be as the Paycheck Protection Program (PPP) ends in the fall.
Within the capital markets, there hasn’t been an uptick in distressed deals, nor a sharp increase in cap rates and reduction in property volumes. This interesting time to acquire could mean increased opportunity for smaller firms to compete.
For investors, the message is this: If you were a fan of industrial three months ago, you’re an even bigger fan now.