Before the staggering events of 2020, industrial was the favored asset class among most CRE professionals. That sentiment has only grown under the duress of the pandemic, as more users than ever before have turned to e-commerce during stay-at-home orders.
NAIOP recently conducted a survey of its U.S. members on how COVID-19 has affected both their business and their local market. The results of the survey—the third one that NAIOP has conducted since the outbreak began—suggest that development conditions are on the upswing since May.
The survey gauged the sentiment of 351 NAIOP members as of mid-June. The respondents include developers, building owners, building managers, brokers, lenders, investors and other commercial real estate professionals.
The biggest takeaway was that, despite all the uncertainty right now, the respondents’ view on the industrial sector approached bullishness. Between the April and June surveys, the portion of respondents who witnessed new industrial development more than doubled, rising from 18.5 percent to 43.2 percent.
“The pandemic has fundamentally changed the ways that we work, shop and live,” said Thomas J. Bisacquino, president and CEO of NAIOP. “For e-commerce, this means a greater dependence on the delivery of products and higher demand for the industrial/warehouse sector.”
In addition, more than 70 percent of respondents reported seeing one or more industrial building acquisitions. Contrast that with the 49.1 percent of respondents who reported experiencing building acquisitions within the next-strongest sector, multifamily. Office acquisitions factored into 37.1 percent of respondent’s recent experience and, unsurprisingly, nearly 80 percent of respondents haven’t seen any retail deals in the last three weeks.
“The industrial market is continuing to strengthen rapidly [and] we’re optimistic the market will continue to strengthen,” one anonymous respondent said. “The difference in market dynamics in the past 30 days is amazing.”
Since the start of the COVID-19 crisis, leasing and financing conditions have slowly but steadily improved, which is likely a key contributor to the increase in development and acquisitions activity. Though two-thirds of respondents have experienced delays in permitting or entitlements, other metrics are rebounding.
From the May to June surveys, respondents reported favorable conditions for both leasing activity (49.4 to 57.2 percent) and financing timelines (16.1 to 23.3 percent). That said, debt financing may be harder to come by for the near future, even for industrial projects.
“Lenders are now very conservative in the underwriting and structuring of transactions,” said one respondent, “which will continue for at least the next 12 months.”
On the equity side, many investors are perhaps more willing than banks to commit funds for the right deals. Even so, they are proving more risk averse than they would have been before the pandemic.
“Many institutional investors have not changed their return requirements, but they want to get those same returns by taking less risk,” one respondent said. “On the family office/private side, some are still moving forward with reasonable yield expectations; others have increased their yield requirements on the basis of relative value.”
When the impacts of the pandemic first began to take hold in March, many kept their eyes on April 15th; would rent collection drop or would tenants seek some sort of relief? Even if they did, there could be a delayed reduction in rent collection into May and June if tenants burned up any capital reserves.
According to the April survey, more than 55 percent of respondents said that 90 percent or more of their industrial tenants paid their rent in full and on time. That number rose to more than 70 percent in the June survey. Most building owners and operators are working with tenants, upon proof of financial hardship, by offering to delay and amortize rental payments, or adjusting lease length in exchange for rent relief.
Hopefully, reality will align with some of the respondents’ expectations. While most expect the pandemic’s downward economic effects to last more than a year, fewer foresaw in June—compared to the May survey—lasting impacts to their own business. Only time will tell what the full impact of COVID-19 really will be on all aspects of the commercial real estate industry.