When the COVID-19 pandemic struck the U.S. earlier this year, it was unclear what the effects would be on industrial real estate. But nearly six months into the crisis, it appears that the sector has been more resilient than others, according to participants in a panel discussion during I.CON Virtual 2020 on investing in industrial properties in the wake of COVID-19.
“I don’t think we’re immune to what’s happened, but we’ve held up well,” said David Fazekas, a senior managing director with the Black Creek Group.
The panelists agreed that an explosion in e-commerce activity at the height of the pandemic, when much of the country was under stay-at-home orders that curtailed consumers’ ability to shop, is a major factor behind that stability.
“Accelerated adoption of e-commerce was definitely a positive trend of the pandemic,” said Michael Coppola, a partner with Bluewater Property Group. “E-commerce has changed our industry. We’ll all be attuned to how much of that sticks.”
Stephanie Rodriguez, vice president of leasing and development with Duke Realty Corp., said online sales accelerated much faster than she expected during the pandemic.
“The e-commerce increases we’ve seen in the last few months have been astounding,” she said. “In this short amount of time, we’re outpacing where we thought we’d be in three years.”
Along those lines, panelists noted that demand for industrial space held up well during the crisis, and e-commerce giant Amazon is a major reason. The company added about 175,000 employees at a time when more than 30 million Americans were out of work.
“The space that is coming online is getting gobbled up by Amazon,” Coppola said. “That’s certainly going to help rent growth.”
Opportunities and Markets
Coppola said that his company, which is focused on the Northeast, will continue investing in that region.
“These Tier-1 infill markets are insulated from long-term trends that COVID-19 is not going to change,” he said. “COVID has only accelerated a lot of those trends. We don’t see anything in the way of distress, unless it’s a one-off like a retailer or someone with liquidity needs. We’re in a bit of a wait-and-see period now. Buyers are being appropriately cautious right now.”
Rodriguez said her company is also holding for now.
“Pre-COVID, we were looking at asset investments in Tier-1 coastal markets,” she said. “Last year, we did over $1 billion in development. We were also looking to acquire more land. Post-COVID, we’re taking a wait-and-see approach on acquisition, and we’re focusing on under-allocated markets. We were taking a pause on spec, but we’re still looking to complete $300 million to $450 million this year. We will continue to look at acquisitions going forward, but in general we haven’t seen fire sales going on just yet.”
Fazekas said values have held up really well in industrial space, despite a lack of data points because of closures related to the pandemic.
“We were really worried about how we were going to get surveys and get titles done and recorded with courthouses closed,” he said. “We had a few hiccups along the way, but we were able to navigate that. Inspection and permitting were delayed, but most municipalities moved quickly to virtual, which was surprising.”
Other panelists echoed that sentiment.
“We were impressed with municipalities that really adapted better than we thought they would, whether with Zoom or teleconference meetings,” Coppola said.
Rodriguez said in her area in South Florida, larger municipalities did OK, but there was a lag in reviews and approvals in smaller cities. “It was sort of a mixed bag,” she said. “Larger, more sophisticated municipalities adopted fairly well.”
The panelists all agreed that lenders are more cautious in the current climate.
“They’re still in a bit of triage mode trying to figure out their mandates going forward,” Coppola said. “Caution is definitely the word in the lending market now. If you get a loan, it’ll probably have some kind of recourse tied to it. That’s why relationships are more important than ever.”
Fazekas agreed. “Spreads have widened,” he said. “Leverage levels have increased. We’ve gotten more requests for recourse.”
Rents and Leasing
Fazekas said he expects rent growth to be slower in 2020 and into 2021. Rents had increased an average of 5% to 7% per year for the past five to seven years, and he sees them returning to that level starting in 2022. Despite that, he said demand for industrial space is holding up very well.
“We’re still feeling optimistic,” he said. “We’ve also been really surprised at the level of our rent collection.”
Fazekas said leasing activity has also been strong during the pandemic, though it depends on the size of the tenant.
“What we’ve seen to date is the larger tenants with the bigger balance sheets really didn’t slow down and were active through COVID,” he said. “The smaller tenants under 200,000 square feet were a little slower. They were definitely more affected by the pandemic.”
However, Fazekas said he’s seen more activity from smaller tenants in the past 30 to 45 days. He attributes some of that to loosening up in the financial markets, as well as the arrival of funds from the Small Business Administration’s Paycheck Protection Program. Additionally, some operators discovered that their businesses thrived during the pandemic because they were deemed essential by the government and were allowed to stay open.
“They were more critical than they were before the crisis,” he said.
From meat to toilet paper to cleaning supplies, shortages and supply-chain disruptions were a major topic in the news at the height of the pandemic. Panelists agreed that the experience could force some changes in how supply chains operate in the U.S., with warehouses keeping more inventory on hand.
“People don’t want to be caught flat-footed in a future crisis,” Coppola said.
Fazekas said there could be an increase in the onshoring of manufacturing, especially for critical goods. “We’ll also likely see inventory swelling for some products,” he said, adding that small increases in inventory could lead to massive moves in demand for warehouse space.
Rodriguez noted that the rise of e-commerce also brings greater demand for reverse logistics.
“It’s something we can’t ignore,” she said. “Something like 30% of online purchases are returned. We’ll see an uptick in demand on that front.”