COVID-19 has quickly been a disruptor to markets of every stripe. For the industrial real estate asset class, this disruption has largely been positive thus far.
REjournals recently hosted a webinar as part of its Breaking Through the Disruption series. This time, the speakers addressed the highs and lows that the pandemic has wrought within the industrial sector on a national scale.
The pandemic has done hamper industrial transactions, with the panelists reporting good leasing activity even in these last couple months. Development, however, has slowed down with many speculative projects being put that on hold. There was optimism, however, that a surging e-commerce segment, increased safety stocks and the possible reshoring of manufacturing jobs will help to fill vacancies and keep the sector firing on all cylinders.
“The typical recessionary playbook is retention goes up, spec leasing goes down and rent growth declines or ceases. This doesn’t necessarily feel like a typical recession in many ways,” said Benjamin Butcher, chief executive officer, STAG Industrial. “The industrial sector will slide through this recession, no matter how long it may persist or how short it may be, because of these additional demand drivers.”
As the previous cycle hit new records, one problem that had plagued the industrial sector was access to quality labor. The pandemic, unfortunately, severely tipped the scales and kicked the U.S. unemployment rate into the double digits. However, it may not be long before it becomes a worker’s market once again.
“When you have millions and millions of people unemployed, that doesn’t seem like it’s going to be an issue,” said Pete Quinn, SIOR, national director industrial service at Colliers International and the webinar’s moderator. “But assuming that we’re all correct and there is going to be growth and as people change the way they move their products, I think labor is going to be an issue again. And it’s going to be happening a little bit sooner than people think.”
Michael Murphy, chief development officer at CenterPoint, agreed, pointing out that 85 percent of his tenants have continued operations over the past three months. The logistics industry has seen a rice in robotic pickers and other technologies, but at the moment, the sector still runs on manpower.
“There are certain distributors that have gone somewhat automated, and I think that will continue as a trend over the years,” said Murphy. “But labor in our warehouses and in our trucking industry will continue to be an issue as the economy comes back and as demand comes back.”
As president and chief investment officer of Link Industrial Properties, Nick Pell brought a look into which markets are poised to perform the best over the coming months from an industrial perspective. The smart strategy is target markets such as Tampa, Nashville, Orlando, Raleigh, Dallas and Austin with high population increases. However, he highlighted recent activity in low-barrier-to-entry markets with high supply, such as southern Atlanta and West Chicago.
“If you had a million-footer in Atlanta, it probably leased up over the last couple of months. These things ebb and flow,” said Pell. “But I still believe that demographics cure all. If you look at that where people are moving, COVID-19 and the flexible lifestyle of working from home can accelerate some of the movement of people that’s been happening for a long time.”
E-commerce had been growing significantly over the last several years and the pandemic has compelled many people that swore they would never buy anything online to do exactly that. This doesn’t just mean demand for Class A space in former greenfield sites. As Scott McKibben, chief investment officer, managing principal at Brennan Investment Group pointed out, e-commerce and other drivers are ratcheting up demand for space in older, denser industrial districts.
“In addition to e-commerce, cold storage has been taking up a lot of infill locations and there’s growth in that market that’s definitely underserved,” McKibben said. “Even data centers—though they’re not technically industrial real estate they are taking land that would be used for industrial.”
McKibben pointed out that typical vacancy rates for infill locations in most markets runs in the 10 to 15 percent range, but a lot of markets are seeing less than 5 percent vacancy rates. This will only create more opportunities for developers that are well capitalized.
The panelists touched on a number of other important topics. Did you miss this webinar? You can rewatch all past webinars on our YouTube channel. And be sure to check in on REjournals.com/webinar for any future events.