Forecasting the performance of a market or an asset class is nearly futile in the best of times—and 2020 is certainly not the best of times. It’s a little easier, however, with some baseline information.
Peering into the Chicago market, for example, there was 43.5 million square feet of industrial leasing in the last four quarters, ending with Q3 2020, according to new research from Avison Young. Looking ahead, industrial leasing and construction are expected to remain strong going into 2021. Those businesses engaged with the consumer goods, grocery and medical supplies sectors should lead much of the activity.
“We expect 2021 to be a robust year for the industrial sector as e-commerce demand, along with growth in traditional manufacturing and warehouse operations, drive growth,” said Erik Foster, Avison Young principal and head of industrial capital markets. “Investors are focusing on core markets due to their resiliency and the access they provide to large consumer populations.”
With this tumultuous year nearing its close, now is the time to prognosticate on where trends may be heading, at least in the near term.
1. The e-commerce explosion will continue
Online shopping—and the resultant warehousing and shipping of goods to consumers’ homes—has been the significant driver for the industrial sector in recent years. This trend expanded during pandemic lockdowns and is only expected to increase next year, perhaps by as much as 30 percent.
And while Amazon is the big dog in this arena, they aren’t the only ones to have benefitted. Target and Walmart reported 24 and 97 percent sales growth, respectively, in their Q2 2020 quarterly filings, with much of that volume coming from e-commerce sales. Regardless of the retail source, this growth in online shopping has led to a surge in leasing and construction of warehouse space.
The direct-to-consumer movement of household goods was a strong, yet growing, trend prior to COVID-19. There have been new developments in other areas since the start of the pandemic, however, as consumers have had to transfer their typical restaurant spend. Unable to go out to eat as they might have in the past, more people are turning to curbside pickup, delivery and grocery store for their food purchases.
“We’ve seen a significant shift in food consumption during the pandemic and that is changing how food is distributed,” said Jim Clewlow, chief investment officer with Oak Brook, Illinois-based CenterPoint Properties. “The grocery segment is surging because more people are eating at home. Grocers are also adding to their bottom line by providing value-add services such as premade meals.”
Nationally, consumers aren’t eating more during the pandemic. And yet, this change in behavior has altered how food moves through the supply chain—leading to renewed demand for warehouse and cold storage space.
2. Investors will target core markets and stable assets
Presume that investors will largely focus on core markets with access to large populations centers, such as Dallas, Atlanta, Southern California, New Jersey and others. This of course also includes the Chicago market where a centralized location, strong manufacturing base and access to transportation and intermodal infrastructure leaves it well positioned for industrial growth.
“I anticipate we will continue to build upward momentum through late 2020 and into 2021,” said Jojo Yap, chief investment officer with First Industrial Realty Trust, based in Chicago. “We expect strong momentum in industrial leasing, construction and investment, particularly with infill land positions and in land constrained markets.”
The industrial sector has not only performed admirably during the pandemic, but it has also remained stable throughout, which should continue to attract investors. Among its many attributes, the asset class has the lowest Capex costs of all product types, something that Yap expects to continue for some time.
The average stock prices of industrial REITs, per a recent Avison Young review, are close to pre-pandemic levels—down only 4 percent, second only to data center and self-storage REITs. Investors, including international real estate funds, appear to be keen on targeting a variety of U.S. industrial asset types.
“Investors are looking at different segments within the asset class, such as transloaded or truck terminals, freezer cooler facilities and data centers,” said Foster, “in order to gain access into a wider base of asset types.”
3. Robust construction activity will have ripple effects
Chicago saw several record years of development between Q1 2018 and Q3 2020, with more than 50 million square feet of new deliveries coming to market during that time, according to Avison Young data. That trend is only continuing, with another 20.4 million square feet of construction activity underway as of the third quarter of this year.
“Everything seems to be clicking on all cylinders,” said Anthony Pricco, president, Bridge Development Partners. “The unfortunate events surrounding the COVID-19 pandemic have really been a huge boom for industrial warehouse usage and I don’t think that will change.”
All of this development activity is going to create reverberations throughout the market. For instance, land prices are on the rise—back to pre-pandemic levels in many top-tier markets. This is creating competition for sites, including from REITs.
Bridge currently has 25 million square feet of existing and pipeline development around the country. This includes 575,000 square feet of warehouse space in two buildings that the firm developed in Cicero, Illinois as an Amazon fulfillment center. This project is indicative of how import land is to e-commerce-related companies that rely on large fleets of delivery vehicles.
For the Cicero project, one 343,000-square-foot building is used solely for vehicle parking and staging of delivery vans. “Parking is so critical to them,” Pricco said. “It is such a small part of their overall business expenses, but it’s vital to their business model.”