Everyone is talking about post-COVID real estate investment markets. Clearly there will be winners and losers, but how deep was the pandemic’s impact, and where are we currently from a capital markets perspective?
A panel of experts took to the digital stage at NAIOP’s I.CON Virtual 2020 to answer the tough questions. Moderator Kevin Shannon with Newmark Knight Frank was joined by Nicholas Pell, Link Industrial Properties; James Clewlow, CenterPoint Properties; and Barbara Perrier, CBRE, as they reflected on the last quarter and what they see on the horizon.
“Going into late February, it was as robust a capital markets environment as I’ve ever seen,” said Pell. “There was a deep buyer pool and a scope of assets for buyers to pursue. Then COVID hit and everything sort of stopped overnight.”
Perrier concurred, saying, “At the beginning of 2020, we all thought it would be a banner year. Then it all halted, and the only thing moving was single-tenant, long-term deals in core markets.”
Fortunately, the panel agreed that the pause was short and far less damaging than initially projected.
“The East Coast and West Coast have snapped back quickly, and the center of the country is getting there, but just not quite as fast,” said Clewlow. “Leasing was off some, but a lot depended on the market and what level of shutdown was happening there. For example, Houston was very strong all the way through, and so was Florida.”
CBRE is seeing positive leasing activity too, said Perrier, and broker sentiment is very high.
No industrial real estate conversation can happen without talking about Amazon, which has taken 25 million square feet in 2020 to date, and that doesn’t include what the company has in escrow. Third-party logistics providers and logistics companies are also taking huge swaths of inventory, as well as spaces suited for the reshoring of manufacturers.
“Every 100 basis points of increase in e-commerce sales is 46 million more square feet of industrial space,” said Shannon. And while industrial real estate remains strong as a whole, not every market or product profile can be on top.
“The winners are those with great locations,” said Clewlow. “The ‘location, location, location’ adage is very applicable to industrial today. Companies like Amazon and Wayfair want to be near their customers, and the issue is what kind of building works for them. Does it have to be new? Not always. Amazon is preparing to move into a renovated former big box warehouse space in Torrance, California.”
The demand for these prime spaces are reflected in rents, as there are rent spikes for the best locations and challenges for the worst. “A building may be functional by all standards but not in the right location, and those are the ones slower to lease,” he said.
Traditional multitenant industrial business parks are still emerging from COVID’s impact. “A lot of those deals were shelved because of uncertainty on the rent roll,” said Perrier. “Disruptions were short term, and collections have been strong at 90-95%. We expect to start seeing multitenant parks coming back online after July 4, with very active third and fourth quarters.”
Investors are still eager for deals, the panel agreed, with desire for logistics and industrial space never stronger, particularly by offshore capital. Pell said Link has actively pursued deals too, closing $1.9 billion in acquisitions and selling $900 million in dispositions this year.
CenterPoint’s acquisition by the California Public Employees Retirement System (CalPERS) gives the company a lot of bandwidth, said Clewlow, allowing the company to focus on Core, Core Plus and Value-add investments.
There’s a lot of capital chasing infill markets, especially if pricing is right, noted Perrier, referencing large site sales that CBRE just completed near both Los Angeles International Airport and the Hawaii’s Port of Oahu. “A lot of lenders want to get into industrial space, and it’s a good opportunity now because it’s a safe haven.”
The panel agreed the COVID-19 crisis may have spurred fundamental changes to the market and the players within it. “COVID accelerated the e-commerce trend by five years,” said Perrier, noting that 40% of all retail sales being online was once projected for 2030, but is now expected to be realized by 2025. “Everybody talks about Amazon, but companies like Walmart, Target and Costco have really gained market share during this period.”
“The debt markets aren’t fully back yet,” said Pell. “It’s getting better every day, so I’m not a pessimist on the debt markets by any stretch, but the CMBS markets aren’t back yet. If you’re not a low leverage core buyer, it’s very challenging. For those that are getting debt done, the pricing is very favorable on a coupon basis, but the leverage levels are lower and the universe of lenders is fairly narrow.”
With regards to deal flow between Tier 1 and Tier 2, Perrier said she believes Tier 1 has returned to pre-COVID pricing, but there is differential in Tier 2. “My sense is that the definition of what’s Tier 1 and Tier 2 is changing; it’s going to be tied more to where population is, because of e-commerce.”
Perrier also said she predicts a shift in retail conversions to industrial space to accommodate the last mile, which will necessitate conversations with cities and municipalities that will see fewer sales tax dollars but will benefit more from occupied spaces rather than vacant ones.