Nobody knows how long this pandemic is going to last. One certainty is that people are going to think twice about their daily habits and change their behaviors. Whether that’s permanent change remains to be seen.
Those changes are already having ripple effects throughout the economy and the world of commercial real estate. When it comes to the industrial sector, it’s difficult to gauge to what extent those impacts will have, in the short or long term.
For example, one theory posits that stay-in-place mandates are encouraging people to order even more items via online shopping than they had in the past. Could this mean that e-commerce—and thus, e-commerce-related logistics centers and warehouses—will reach new levels of demand above the already impressive heights that it had previously reached?
Perhaps not, at least in the short term. Amazon has put on hold what they’re calling non-essential deliveries for the next 30 days, which will certainly create an issue in the supply chain. One downstream effect, however, is that the number of people yet to become online shoppers is shrinking daily.
“The late adopters of shopping at home have now learned about it. Once you know, you know, so there will probably be continued growth in e-commerce, and therefore the logistic needs,” said Bob Linton, a member in Dykema’s Chicago office and leader of the firm’s technology committee. “Maybe this will accelerate the sector more than it would have in the absence of it.”
Before COVID-19, cold storage was a fast-growing segment of the industrial sector. People have to eat, after all, and the cold storage infrastructure supports two strong retail segments—restaurants and grocery stores—as well as a recent boom in online food orders. As people become hyper-aware of interacting with others during the pandemic, this asset class could grow even more in popularity.
“Cold storage facilities allow you to get produce from farmers to consumers’ porches, touching the fewest amount of hands. I can see that being a successful endeavor during this during this downturn,” said Mark Silverman, a member in Dykema’s Chicago office practicing in the areas of business and financial services litigation and a co-team leader of the firm’s commercial mortgage-backed securities special servicer group.
That doesn’t mean, however, a surge in speculative cold storage development. There already exists a decent amount of space on the market in Chicago that can be repurposed. And that’s not even considering the space that will be added back to the building stock as some companies unfortunately go out of business because of the pandemic.
“Businesses are getting hit very hard because they can’t keep their workforce coming into the office or the plant and they also can’t keep their customers buying because restaurants have slowed down their purchasing,” said Silverman. “I think there’s probably enough capacity to repurpose cold storage to the different types of supply chain needs of our new and shifting economy.”
In both the logistics and manufacturing segments of the industrial sector, more and more users have been seeking out automation options to cut down on labor costs. As employees wait out the pandemic from home, some businesses may redouble their efforts to seek out automation options as a way to get their operations up and running more quickly.
“If you’re pre-packaging foods, for example, instead of having human hands touch the product you can automate the line. That’s a huge enhancement,” said Silverman. “Now you don’t have any downtime if there’s another global pandemic.”
We are likely 12 to 18 months away from mass producing a COVID-19 vaccine. Even after this initial stay-at-home order lifts, there may be flare-ups in the next year where another two- or three-week mandated social distancing period is necessary. This repeated labor uncertainty could help to hasten the move toward automation.
A new disruptor
“This is going to change everyone’s behavior for good in small ways,” said Linton. “It’s going to impact businesses, though it’s hard to predict exactly how.”
Disruption is not new to real estate. It’s well documented to the extent that the e-commerce phenomenon has altered the retail and industrial asset class trajectories. Coworking is disrupting the office sector and the effects of the 2008 housing crash are still being felt throughout the multifamily sector.
“I’ve already started to see social media ads for ‘small batch hand sanitizers.’ Small batch hand sanitizers! Like it’s a fine bourbon or something,” Linton said. “I have no idea what the efficacy is, or what testing has gone on or if the product will actually ship. It’s a brave new world.”
The 2020 pandemic will almost certainly be a disruptor to all those asset classes, to varying degrees. It remains to be seen, however, what long-term effects the industrial sector will see.