March 31, 2021

While many CRE investments had a difficult year in 2020, industrial was a rare exception. Can we expect this rise to last? What will industrial look like over the next few years?

Covid-19 & Industrial Real Estate Prospects

The Covid-19 pandemic had significant impacts on CRE across the board. Most sectors experienced high volatility and intense disruption. However, the volatility wasn’t even.

While sectors like office and retail saw price drops YOY, industrial actually experienced price increases as demand for these properties grew in 2020. In August 2020, the industrial price index increased by 7.4% YOY.

This price increase can largely be explained by the acceleration of existing trends. eCommerce has been growing for more than a decade, but lockdowns, stay at home orders, and other measures put in place to combat the pandemic also pushed more people to shop online. In order to fulfill online orders, companies need industrial space for processing and logistics rather than retail space.

Online retail sales worldwide grew aggressively in 2020, from $3.354 trillion in 2019 to $4.28 trillion in 2020. This is the largest increase in online retail sales ever, with the average increase per year sitting between $300 – $600 billion since 2014. While the online retail sales trend has been showing growth for years, 2020’s growth was unprecedented.

Vaccine Administration & Its Impacts

By March 19th, 2021, there were 100 million doses of Covid-19 vaccines given out in America. The Biden administration plans to have 200 million doses given out by April 30th, at a current rate of 2.5 million per day and accelerating.

While getting vaccines to people isn’t going to completely stop the pandemic or reverse the damage it’s done, it’s a step in the right direction to restore both customers and investor security.

Will the vaccination of the general populace cause any changes in the current trajectory of industrial real estate? That’s the question many investors are asking while considering expansion of existing industrial investments and new investments.

Industrial Real Estate Projections in 2021 and Beyond

Out of top companies surveyed by Deloitte, 59% state that they expect demand for industrial to reduce in the next 18 months and beyond, as opposed to 24% who anticipate an increase in demand for industrial real estate leases in the same time period.

Expert projections suggest that 2021 may also be a large growth year for industrial as we see more of the same conversion from retail to industrial to accommodate ecommerce growth. Construction and renovation of industrial spaces is likely to be an attractive market throughout at least 2021.

Projections from JLL anticipate around 1 billion square feet of industrial space in demand from 2021 to 2025, although this is unlikely to be exclusively new real estate.  Absorption of industrial real estate is expected to remain high in 2021 with slower growth all the way through 2025. However promising the projections are, there will likely be a ceiling on this growth.

The shift to ecommerce experienced an unexpected boost in 2020. The trend will slow down, as it represents a change in how people are buying rather than how much they’re buying. BEA data indicates that consumer spending reduced YOY in most months of 2020, with similar trends starting in 2021 as well. What this means is that the method of buying has changed while purchases overall have actually decreased.

In 2021, industrial is behind where it needs to be to accommodate a huge burst in demand. As the industry powers on to fulfill demand, it’s unlikely that demand will continue to grow at the rates we saw in 2020, leading to the potential for investors to overcorrect.