IllinoisIndustrial Attitude towards industrial real estate counters tumbling sentiment of other sectors Matt Baker August 10, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email Overall, both U.S. sentiment and activity are down as a direct result of the COVID-19 pandemic. But even as commercial real estate professionals stake out bleak stances on the near-term performance of the office and retail asset classes, they are still seeing demand for industrial. A new report from RICS details the results of a questionnaires from more than 2,000 CRE companies. Responses in the Americas were collated in conjunction with the Association of Foreign Real Estate Investors. During the second quarter, the U.S. respondents saw a significant worsening in conditions. Investors reported a 25 percent decline in activity, with the outlook of occupiers even more severe, showing a net contraction in activity of nearly double that. “As the economic impact of COVID-19 has deepened, so too has the impact on commercial real estate,” said Simon Rubinsohn, RICS chief economist. “Sentiment among investors and occupiers has naturally weakened, with broad acceptance that rental and capital values will fall over the next year. The retail asset class elicited an unsurprisingly negative outlook, but respondents also reported fewer enquiries with the office sector. Due largely to an explosion in e-commerce during stay-at-home orders, demand rose within the industrial sector. “What is clear, however, is that there will be no going back to the old normal, even after a protracted economic recovery and significant government interventions,” Rubinsohn said. “Underlying trends have been accelerated by lockdowns, whether the global rise of e-commerce or remote working, coming to the fore, changing the nature of demand for many ‘traditional’ commercial assets. We will see investors, landlords and tenants continue to adapt to a new reality—not least, in their approaches to office space.” While respondents predicted that office and retail rents—as well as capital values—will fall over the course of the next year, their outlook for the industrial sector remained positive. In particular, the CRE professionals who responded to RICS’ survey highlighted properties in prime markets as well as data centers as the stand-out assets where rents are likelier to remain relatively stable. The providence of industrial properties is directly tied to the hardships that retail assets are facing. E-commerce was a disruptive force before the pandemic, sending the two sectors on diverging trajectories. COVID-19 has only exacerbated this trend. U.S. demand for retail space fell precipitously in Q2, down by 98 percent, suggesting that virtually all respondents witnessed reduced demand among retail tenants. While this has significantly impacted retail rent expectations for the next 12 months, expectations were positive for logistical warehouse and other industrial assets. Looking at the property cycle as a whole, over two-thirds of respondents believe that the market is in a downturn phase. It’s clear that the fallout from the pandemic will continue to have an adverse effect on commercial real estate and the global economy for several quarters yet.