Six months into the pandemic, one sector has outclassed other commercial real estate property types: industrial. Remarkably low vacancy rates, millions of square footage in construction, and healthy activity in primary through tertiary markets point to industrial assets as one of CRE’s most risk-tolerant assets.
Fundamentals of Industrial Commercial Real Estate
It’s no secret that industrial has been an investment favorite over the last few years. Early in 2020, Cushman & Wakefield’s annual North American Industrial Outlook predicted the asset class as the most attractive property in terms of both investing and development. The rise of e-commerce, coupled with previously robust consumer spending and low employment, pointed to industrial’s continued growth over the next two years. COVID hardly dented these projections
Per JLL’s US Industrial Outlook Report for Q2, vacancy rates averaged below 6% nationwide, with rents unchanged from the start of 2020, hitting an average of $6.30. In Q2, construction delivered 78.5 million square feet in the US. Asking rents in critical markets such as Long Island, Jacksonville, and California’s Inland Empire jumped up between 6.5% and 19.6% from Q1 to Q2, while other markets such as Los Angeles and Minneapolis/St. Paul saw rents decrease by 12%.
COVID’s Impact on Industrial
Like past economic periods of uncertainty, we’ve observed a shift of capital allocation from other asset classes to industrial sectors. This has caused pricing to tighten and increased competition in industrial assets, multifamily as a close second.
Ecommerce accelerates amid paused market
The COVID-induced explosion of ecommerce and subsequent faltering of other property types has only boosted interest in industrial properties. Consumers, shut-in due to safer-at-home orders, pivoted to online shopping for everything from clothing to grocery deliveries. The mass appeal of quick delivery options and an immense merchandise selection, in turn, propelled retailers to invest in industrial space to house and ship online purchases.
Even online grocery shopping has spurred a need for cold-storage spaces. Many grocers such as Whole Foods have converted in-store square footage to online fulfillment use. Distribution centers
As assets like warehouses and logistics facilities continue to weather the storm of ongoing shutdowns and uncertain reopenings, industrial investments will likely attract capital that otherwise would have flowed into other property types. Historically low interest rates will also presumably prompt investors to seize industrial opportunities towards the end of the year.
In many ways, COVID has energized industrial’s growth over the last three quarters, despite the broader economy grappling with the pandemic’s adverse effects.
Warehouses and fulfillment centers get the lion’s share
Interest in warehouses and distribution centers is leading the charge in investor demand. A recent Commercial Observer article noted that investor interest in warehouse properties in the Bronx surpassed interest in multifamily for the first time. Three of the city’s top warehouse lease transactions in Q2 2020 occurred in the Bronx, closing 572,000 square feet of absorption and hitting a record high price of $301 per square foot.
In markets with prime regional positioning, such as Reno, Orlando, and other highway, train, and harbor centers, interest has accelerated in last-mile fulfillment centers. Interestingly, while plenty of older industrial stock in regions nationwide doesn’t fit modern logistical firms’ needs, it is still in high demand. Pandemic or not, people will need stuff, and that stuff needs to be stored in warehouses.
Industrial Properties on Crexi Mirror National Trends
We’ve observed evidence of growing interest in warehouses on Crexi’s platform. In Q2, the number of warehouse listings on the marketplace jumped 179.1% from the previous quarter, following only a 12.4% jump in available inventory from Q1 to Q2.
As more industrials properties came online, the markets’ tight competition has driven up prices in recent months. The average cost per square footage for overall industrial properties shot up 55.02% from Q2 to Q3 to hit $174.87. The rising costs have had little impact on investor and tenant interest: buyer activity surrounding industrial properties increased 34% from the start of the pandemic to the end of Q3. Tenants searching for industrial properties for lease followed suit, with 102% increased leasing activity from Q2 to Q3, including floor plan and flyer requests. Overall leads for industrial properties increased 77.83% from its lowest point in April to September.
As further evidence of its resilience, industrial saw hardly any growth in note searches when compared to other asset classes, namely retail and multifamily. Overall, searches for industrial properties enjoyed a steady increase of 13.67% over the last six months, compared to the previous six months. The number points to the popularity the asset class has retained both before and during the pandemic.
Despite increased competition and COVID-induced uncertainty, industrial shines as the asset class du jour. Plentiful development in the pipeline and the asset class’ resilience make industrial properties a promising investment option for buyers and tenants alike.