By Marc Betesh, founder and CEO of Visual Lease
While the commercial real estate industry has experienced many uncertainties during the pandemic, the industrial and logistics market continues to thrive. With the rapid acceleration of e-commerce in the wake of COVID-19, major online retailers are picking up large warehousing and manufacturing spaces to keep up with the surge in demand, which is ultimately responsible for industrial real estate experiencing vacancies at historic lows in 2020.
The trend of moving operations online is likely to continue at a faster pace after the pandemic subsides. Major retail companies have taken notice and are starting to capitalize on available real estate, converting square footage in malls to last-mile delivery centers and buying up spaces in logistics parks.
To accommodate the increase in tenant demand, the industrial real estate market has already started to adapt. However, with all of the additional leases that have occurred in the short-term, is there still opportunity for this sector to grow?
Who Are Industrial’s Biggest Winners?
According to the U.S. Commerce Department, during the first half of 2020, e-commerce sales rose by 44 percent relative to that period in 2019. This rate of growth marked the highest year-over-year increase for any recorded second quarter and the second-highest rate of any quarter or year overall.
E-commerce giant Amazon has continued to set the pace for many industries, including warehousing and logistics This year alone, Amazon leased its third warehouse in New York, a nearly 1 million square-foot building within the 200-acre Matrix Global Logistics Park on Staten Island. The company already has a large, last-mile sortation center at that location that fulfills orders with state-of-the-art inventory storage, retrieval and distribution operations.
Additionally, retailer Urban Outfitters announced in August it would build a $350 million omni-channel distribution center to support the company’s digital growth. The 880,000-square-foot development, located near Kansas City, is scheduled to be complete by 2022 and will enhance the company’s distribution center network and bring thousands of jobs to the region.
How High is the Ceiling?
As more companies shift to online delivery models, total supply growth of industrial real estate in the United States could reach an additional 1 billion square feet by 2025, according to a recent report from JLL. This projected growth will create more demand in the short term.
With these large estimations, many industry professionals have raised concerns about running out of facilities. In turn, these concerns have required companies to get creative by using other commercial real estate spaces to meet their needs. Most notably, Amazon has explored turning vacant stores in regional malls into last-mile fulfillment centers for faster delivery and more convenient returns for its customers.
Along with companies utilizing new space for their supply chain needs, the demand for industrial real estate will spark a boom of new construction across the country. These build-to-suit properties will address the vacant space shortage and help companies that are looking to expand their industrial real estate footprints.
Future of Industrial Real Estate
As a result of COVID-19, the commercial real estate industry is evolving to meet the needs of companies that had to drastically adjust their business models. Trends we were seeing in the retail industry pre-pandemic have been accelerating, including a rise in online shopping, in-app ordering and home delivery. This quick shift has led to the demand for industrial space, which is only expected to grow in the coming years.
Additionally, as more companies prioritize technology to streamline and accelerate logistics workflow — including investing in robotics and automated solutions — more modern spaces will need to be created for these operations. We could see a rise in demand for more technologically advanced facilities from major retailers like Amazon, Target and Walmart — companies that are known leaders in innovation and experience high sales volumes.
Industrial real estate has remained strong and managed to grow since the pandemic started with relatively little adaptation from landlords. As a result of social distancing measures, people have been less likely to gather at crowded malls and shopping centers, accelerating e-commerce and causing a greater demand in industrial and logistics space.
With this surge, it will be interesting to see how companies get creative with available space and new building plans to continue to transform expectations in the industry.