October 12, 2020

Industrial Sector Shows Promise

Investment in CRE fell by 29% YOY in the fist half of 2020. While it’s not an encouraging statistic overall, it also doesn’t give the full picture of what’s going on with CRE. While many sectors of CRE are lagging, industrial real estate is actually growing.

Increased Demand for Online Shopping

Ecommerce was already on the rise, but in the US today there’s been an explosion in demand for essentials. This leaves online suppliers in search of warehouse space to store the goods they need and distribution facilities to fulfill customer orders.

Industrial real estate was already benefitting from the growth in ecommerce. However, lockdowns and other measures put in place in reaction to COVID-19 have caused that growth to accelerate beyond expectations. According to research by JLL, ecommerce-related industrial real estate leases are projected to account for 20.8% of all industrial real estate leases, up from 11.8% in 2019.

While many sectors of CRE are re-thinking leases and looking to cut costs and reduce the space they’re leasing, ecommerce needs are increasing and companies in this sector require more space to meet that need.

Last-Mile Distribution Space

Along with the storage and warehousing, last-mile distribution space in urban areas is growing in importance. Ecommerce requires a network of distribution locations to both process then deliver goods to customers. This is usually done at a last-mile facility. If the company has a storefront, they may use space in that facility instead or offer curb-side pickup rather than delivery.

More space is needed as online retailers process and deliver an increasing number of packaged to customers. This is a growth area in many parts of the US.

Reshoring Production

International supply chains have been disrupted everywhere. Companies that used to count on production or assembly abroad have been re-thinking their structure and planning for more domestic manufacturing in the future. This is both a short-term and long-term move.

In the short-term, industrial real estate both wins and loses. International companies may pull out of spaces they previously occupied and reduce their dependence on manufacturing outside of their local areas. However, this will happen at the same time as local companies look for options closer to home. Overall, the supply chains will change, but the net result may even out in many areas.

On the horizon, this change could be larger. Companies with complex supply chains and large operations cannot adjust themselves in the short-term, but they may look to build new facilities, or retrofit rented spaces to accommodate their long-term transition plans. Local manufacturing is likely to be most important to the industries which are most sensitive to supply chain disruption, including defense, food, communications, and pharmaceuticals.

Rebound Potential
Although most CRE sectors are not expected to rebound quickly, industrial real estate is set to follow a more optimistic track. Most experts in the industry expect industrial real estate to continue growing as time goes on. Because the sector is already in a better position than other CRE sectors, we can likely expect that trend to continue. Online shopping habits are unlikely to slow down.

In an interview with NAIOP, CityStream Solutions’ founder Maria Sicola also opined that she believes industrial real estate, especially last-mile delivery and storage/distribution, will come out post-Covid in a strong position.