It was the best of times; it was the worst of times. For industrial and office real estate brokers, this Charles Dickens quote seems to encapsulate 2020. And, although still in its infancy, in 2021 this sentiment is continuing to ring true.
Unfortunately (or fortunately, depending on your perspective), while the “best of times” has been primarily felt by the industrial sector, it is the office sector that has borne the brunt when it comes to the “worst of times.” Those of us who have been doing this long enough know that this is not the first time the market balance within commercial real estate has favored one sector over the other. However, I doubt that anyone has witnessed a sector contrast as stark as the one we have seen over the past 10 months.
The effects of COVID-19 have been widespread—impacting Main Street and Wall Street alike. While the vaccine has prompted a sense of optimism to creep into the narrative for the first quarter of 2021, until COVID cases and unemployment rates begin to drop significantly, we’ll likely see little change from the last half of 2020. Remote work will largely continue, and office users will remain cautious about expansions and lease term commitments. At the same time, as home-bound workers, families and students continue to rely on e-commerce, the industrial sector will continue to see strong demand and spec development through the third quarter of 2021.
While COVID has slammed the office market with a double whammy of layoffs and government-induced shutdowns, resulting in an increase in vacancy and a glut of subleases, the industrial sector has seen a rush of new construction and spec development. 2020 saw approximately 21.1 million square feet of new industrial construction deliveries and over 20 million square feet of deliveries are underway for 2021, including 10 million square feet of spec construction.
Based on construction speculation, there appears to be only upside for the manufacturing and logistics market in 2021. However, if demand does not keep up with this rate of development, the oversupply of new spec construction could be an opportunity to get very high-quality space at a reduced rate.
As the majority of the office workforce continues to work remotely, e-commerce will continue to rule the day. Additionally, as the vaccine takes hold, and unemployment decreases, the new habits of purchasing “everything” online will inject more e-commerce capital into the economy, leading to more absorption of industrial space and higher rents.
One variable to consider is federal stimulus, which has historically been a critical factor in quelling any downturn. The federal government granted over $1.8 trillion in stimulus support through the CARES Act in March and passed another $908 billion relief bill just before year’s end. If the recent stimulus package takes hold and/or additional stimulus legislation is passed in 2021, the industrial market could see an economic boom of epic proportions by the fourth quarter of 2021.
A successful vaccine is the major event that will get us “back to normal.” This means that no significant logistical obstacles arise; the rollout trajectory stays on track; those beyond the most vulnerable begin receiving vaccinations in the first half of the year and no health/efficacy concerns arise that could derail societal trust or further threaten the rollout. It is only at this point that we will begin to see the office market level out and we can experience the best of times for office and industrial.
About the author
Dan Smolensky, SIOR is founder and principal of global service provider TMG Real Estate Advisors, representing tenants in the supply chain sector. Dan is currently serving as the regional director for the SIOR Great Lakes Region. For more information https://www.tmg-rea.com/.