While virtually every other sector of commercial real estate suffered from the COVID-19 pandemic, industrial properties thrived. In fact, if one were to review the traditional key commercial real estate metrics, such as absorption, vacancy, deliveries, new starts and rent growth, it would be nearly impossible to tell that there was even a pandemic and economic contraction.
In the 1-2 years prior to the pandemic, the industrial sector was already growing at an unprecedented pace. Then, in 2020 when shelter-in-place orders were enforced, consumers turned to online shopping, including for grocery items. This surge created a huge demand for logistics centers and warehousing. In fact, e-commerce accounts for between 25-50% + of tenant demand.
In 2021, demand is expected to continue. The pandemic has prompted a shift in consumers’ shopping habits, and buyers most likely won’t revert back to their pre-pandemic shopping behaviors completely.
Thus, 1.5 billion square feet of industrial space is expected to be added over the next 5 years, and supply will struggle to keep up with demand for the foreseeable future. Factors such as limited development area and public pushback on warehouse development will be an impediment to the expansion.
And, the size of warehouses will increase, as companies need to allow for “safety stock” in case of any supply chain disruptions. Many suppliers will increase their inventories from 15 days to as high as 60 days. This is a significant increase as suppliers aim to mitigate the negative impact of global trade conflicts by allowing for more onshore inventory.
Additionally, part of the demand for warehousing is for cold-storage (driven by e-grocery shopping), which costs about 2-4x more to build than traditional warehousing. Typically, this type of warehouse is built-to-suit, but investors and developers are becoming more speculative after seeing the demand due to the pandemic.
Investors will also be seeking opportunities near logistic hubs and areas of growing populations, such as the southwestern and southeastern United States.
Overall, while other sectors suffered, the pandemic actually fueled the growth of the industrial sector and highlighted the importance of robust supply chains and logistics centers. However, like anything in life, it isn’t a sure bet. Depending on how the pandemic progresses and continues to affect the US and global economies, consumer shopping habits can shift and perhaps drop, taking the wind out of industrial’s sails.
What are your thoughts on the future of the industrial sector? Share your ideas in the comments below!