Michael Murphy has spent more than 30 years working in the industrial real estate sector. He’s seen plenty of markets, both good and bad. But today’s market? This is a first, thanks to the impact of COVID-19.
Midwest Real Estate News recently spoke with Murphy, chief development officer at Oak Brook, Illinois-based CenterPoint Properties, about how the pandemic has impacted industrial real estate across the country and the changes that might be coming to this still-solid commercial asset as the country slowly begins to reopen.
Has there been a slowdown in demand for industrial product?
Michael Murphy: CenterPoint is active in about 10 markets right now, mostly those with high-population centers, ports and intermodals. Our holdings and footprint are pretty specific to those markets, so I can only speak to what I’ve seen in the locations we serve. We have seen a slight slowdown in the industrial demand overall, given the situation.
However, industrial as a sector has shown a strong resilience during this pandemic. We have experienced reasonable leasing activity and e-commerce demand. We have analyzed our portfolio and our rent collections have remained strong, which speaks to the quality of who our customers and users are. Our tenants are big retailers and supply chain companies that are focused on distribution and last-mile delivery. We are fortunate to be working with companies that have continued to remain stable during these times.
That being said, there has been a slight slowdown in activity. Third-party logistics firms have been cautious during the last 60 to 90 days. It’s been harder for companies to evaluate growth opportunities during these last two to three months. However, with states starting to reopen, the visibility will continue to improve.
E-commerce was already thriving before the pandemic. Do you think online sales will only continue to grow, and provide even more of a boost to the industrial market, as more consumers turn to Amazon and its competitors for groceries and other products?
Murphy: There will be an absolute growth in demand for e-commerce. Companies will need to add even more distribution centers to their supply chain to meet this demand. Big retailers are redefining and enhancing their e-commerce fulfillment platforms. They have been very active and will continue to be active. The rise of e-commerce is certainly playing a role in how healthy the industrial market has been and will continue to be.
Have you seen a slowdown in new construction activity during the last three months or so?
Murphy: There is very little, if any, spec development going on in the industrial market today. All of the publicly traded REITs have stopped new spec development. At CenterPoint, we are evaluating each of our markets and looking at vacancies. One of the biggest questions we look at is whether we are going to inherit any shadow vacancies in the coming months. We’re trying to determine if large occupiers are going to give back blocks of industrial space, and what impact that will have on availability and rental rates for industrial properties. Most of our markets are low vacancy with higher barriers to entry; however, we are continuing to actively monitor the landscape as we evaluate new projects.
Generally, industrial demand has leveled off for the short term. We’re not going to see a tremendous amount of new supply, and many of the e-commerce deals in marketplace have transitioned to build-to-suit developments.
Industrial seems to be one of the asset classes best situated to come out of this pandemic in a healthy state. Do you agree with this?
Murphy: I do think industrial will come out of this in a pretty strong position. Generally, we are not seeing major vacancies or significant new spec construction in our markets. I don’t anticipate seeing major rental reductions, but we are in the early stages of recovery.
What do you see for the future of the industrial market as states across the country begin to reopen their economies?
Murphy: We are in constant communication with our tenants, brokers, transportation experts and industry consultants to continually evaluate the trends and try to anticipate the outcomes.
The strengthening and resilience of the supply chains will be critical going forward. We will likely see an increased demand, not just from e-commerce companies, but from many distribution companies needing to establish multiple independent supply chain solutions. Companies will want to ensure their business has safeguards in place to guarantee performance: If something happens in one area, there is an option B or even an option C to help them get their product to where it needs to go.
The demand for warehouse and distribution space will also increase as a result. Companies will be willing to hold more inventory to better serve their clients.
Are you seeing signs of hope out there for the industrial market and commercial real estate in general?
Murphy: We are. We have active projects in and around Chicago and have also signed leases across the country. Recently, we signed a 1.6 million square foot lease in Joliet, Illinois with a large hardware retailer and are starting to see showings and requests for proposals pick-up again. The momentum is coming back.
During the last 60 to 90 days, most clients have been in a wait-and-see mode as they continue to evaluate the implications of this pandemic. Although, we have seen increased demand for e-commerce and last-mile projects, which is promising.
The big question now for companies is how much inventory do they want to hold at any particular location? We have gone from a just-in-time model that maximized efficiency, to a need for safety stock and redundancy. I believe going forward companies will carry more inventory to enhance their e-commerce supply chains and ensure they can meet the increasing demands of their customers.
Southeast Asian manufacturing, near shoring and greater inventory levels will continue to drive demand for increased visibility and diversification across the supply chain. E-commerce will continue to be the headline for growth, but enhanced supply chain diversity from manufacturer to customer will be the focus. The US industrial warehouse market hopes the strategic modifications in supply chain resiliency will generate increased interest in securing additional distribution facilities across the country to help limit disruptions and achieve optimal customer satisfaction.