While business around the world has slowed because of the COVID-19 pandemic, industrial real estate continues to remain steady and even grow. Customers were already buying many non-essential goods online, but the pandemic caused many more consumers to learn how to shop online, even for items they would have usually bought at brick-and-mortar stores, and experts believe this trend will continue even as vaccines help society reopen more broadly.
E-commerce growth has resulted in continued and even rising demand for well-located warehouses in close proximity to large population centers and transportation infrastructure. Industrial end users are also exploring additional changes to their supply chain, such as keeping extra inventory on hand and incorporating more automation into their warehouses.
In Chicago, industrial leasing volume reached record highs during the first quarter of 2020, prior to the onset of the pandemic. Even with the uncertainty created by the shutdown on non-essential business in mid-March, net absorption of space remained high for the rest of the year. Most manufacturing and distribution businesses were deemed essential, so warehouses and factories remained open throughout even the most restrictive period of the shutdown.
Many major retailers focused their 2020 leasing strategies on ensuring that they had space close to urban centers to gain an advantage in their last-mile e-commerce supply chain. This trend has continued into 2021 as retailers rush to build out their supply chains to serve consumers with expedited delivery.
In addition to making changes to their last-mile locations, many retailers are reevaluating other parts of their supply chains. Pre-pandemic, many manufacturers and retailers relied on just-in-time inventory, meaning they made only as many goods as they thought might be sold or distributed within a short period of time. Now, retailers and manufacturers are investing in additional warehouse space to house more inventory. This is especially true in industries like pharmaceuticals that depend on controlled production of delivery.
Many businesses saw disruptions in their supply chains during 2020 because they could not get essential components of their products that were manufactured overseas. For those companies that found it impractical to re-shore the operations that make these components, keeping excess inventory on hand will be essential to prevent disruptions from any similar events in the future. Warehouses meant to house these components may not be located in the same places as the last-mile distribution centers needed by e-commerce businesses, so properties located somewhat farther from urban centers are seeing some rise in demand, too.
In addition to changing how people shop and how goods are stored and delivered, the COVID-19 pandemic will increase the use of automation across both manufacturing and distribution facilities. In both cases, the need for efficiency, rather than the need to replace human workers, is the biggest driver for this change. Many new distribution centers are being built with automation in mind, with platforms and flooring designed for automated materials handling equipment. As e-commerce is unlikely to slow any time in the near future, the investment in automated warehouse equipment is likely to yield a high return over the long term of its life. Automation also creates efficiencies that may allow industrial users to rethink where their warehouses are located. Without the need for a large labor force, e-commerce retailers may be able to move closer to urban centers to better distribute their goods.
While the world anticipates a return to normal in 2021, industrial real estate users and brokers are hoping to see continued rises in leasing and development. Manufacturers and retailers are planning ahead to buffer themselves against any future shutdowns and trying to predict future issues before they arise, which should keep industrial real estate healthy for several quarters to come.
Brendan Sheahan is vice president of Darwin Realty/CORFAC International in Elmhurst, Illinois.