Industrial rents, construction, leases and more: What happens next? Matt Baker April 27, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email Though it is nearly universally considered the strongest real estate sector, the COVID-19 crisis nonetheless has many wondering what the future hold for the industrial market. Last week, REjournals hosted a webinar to address that very question. The speakers on the webinar included Corey Chase, senior managing director, Newmark Knight Frank; Alfredo Gutierrez, president and founder Sparrowhawk; Chris Moore, director of project development, FCL Builders and Ken Verne senior vice president asset management, Bridge Development Partners. It may seem as if the pandemic has been going on for ages, however we are still very early in this crisis. There will be long-term impacts, but when it comes to construction project so far, it has been more or less business as usual—or as usual as can be expected. “We have a pretty solid backlog currently and our estimating pipeline is full,” Moore said. “Here in the Midwest we’re seeing more build-to-suit opportunities than speculative development—though we did just receive a contract on a new million-square-foot spec facility here in Chicago, so I guess that kind of goes both ways.” On the management/brokerage side of things, fault lines are showing much quicker. Chase reported that most tenants made their rent obligations in April, though May and June may be a different story if those tenants start to dip too far into their reserves. “We’ve got over 80 tenants throughout our portfolio and almost half of them have reached out asking for some level of concession,” said Verne. “We’re happy to help If we can, but we want to be sure … that we’re not the only answer.” Rent is a large line item for businesses, but by no means their only one. Verne said that landlords should work with tenants to make sure they are using a multi-step process to reduce costs, including taking part in the Paycheck Protection Program, reducing payroll, or seeking concessions from other vendors. “I’ve been talking to several developers over the last 30 days and we all agree that the industrial market will be the first bounce back. But there are a lot of tenants out there that are struggling, at best,” said Chase. “Next month I’ll be celebrating my 35th year in the business as a broker, so I’ve been through several of these changes in the in the market.” The tool that has worked the best during past downturns, according to Chase, is the “blend and extend” practice. If a tenant has a few years remaining on their lease, a broker can approach the landlord and ask to bring the rent in line with what is now the going market rate; in exchange, the tenant will extend the term of their lease. This is a win-win: the landlord can keep a space occupied for longer and the tenant gets the benefit of a rent reduction. According to Gutierrez, a number of manufacturing jobs that were lost to China and other overseas locations were already starting to return to American shores. The COVID-19 crisis may hasten some of those homecomings. “Manufacturing is coming back,” said Gutierrez. “The need to have a supply chain closer to the customer base is particularly conspicuous in a situation like this, but it was already starting to slowly come back.” With empty containers spread out through North America and Asia, it’s clear that the manufacturer-to-consumer supply chain is not functioning efficiently right now. Reshoring those manufacturing jobs is one way to shorten the supply chain. If this scenario plays out, smaller, Class B infill properties may become a higher priority. The speakers touched on the supply of spec warehouses that have exploded in recent years—and how long it will take to fill those spaces in this current climate. Verne acknowledged that these properties may take longer to lease up, so Bridge has been building out spec suites within many vacancies to help them move more quickly. In terms of the “new normal,” everyone is still trying to figure that out and it changes almost daily. But according to Chase, there is one occurrence from our nation’s recent past that may inform how COVID-19 may impact future development. “I see this as a similar pattern to what we saw in 1990 with the American Disabilities Act,” Chase said. While most take it for granted these days, the ADA legislation mandated certain building features, such as larger elevators, wider hallways and ramps to accommodate wheelchairs. Buildings had to make expensive upgrades to comply, and we may see something similar whereby properties will have to provide sanitation stations, install turnstiles, disinfect HVAC components or take other measures. Like the ADA, the office sector would be the hardest hit by these measures, but industrial properties would not be immune. The speakers touched on a number of other topics, including the state of cold storage, industrial construction financing and the crisis’ impact on e-commerce logistics. Check out REjournals.com or our social media streams to make sure you know about all of our upcoming webinars. You can also watch past webinars, including this one, on our YouTube channel.