For years, “just in time” has been the key to driving efficiency of retailers and manufacturers alike. This model by and large combined low-cost production in Asian markets supported by speedy air carrier distribution to move goods while holding minimal cushion for backup stock. Post-pandemic thinking could bring that epoch to an end.
The crisis has underscored our distribution networks’ fragility, which are now vulnerable to closed facilities, ports and borders. Many businesses are planning major restructuring of their supply chain processes due to the disruptions that we all have endured in recent months.
The new model based on quick recovery will likely be driven by resiliency that ensures adequate merchandise availability in the event of threats to a business’ supply chain stability. This will require more warehouse and distribution space to store goods for deliveries in last-mile markets.
Steven
McCraney
President and CEO,
McCraney Property Co.
The noticeable effects continue to grow as more last-mile oriented warehouse space is leased closer to the end-user. Industrial users see the impact of the pandemic as a short-term challenge that is altering the long-term growth strategy of their corporate planning. By way of example, Publix’s Southeast store sales climbed 21.8 percent for the second quarter of this year. Grocery now represents 9 percent of overall e-commerce transactions.
Despite the COVID-19 pandemic, the industrial sector is experiencing an uptick in demand due to the demand for essentials and non-essentials. While the hub-and-spoke mentality of distribution has morphed in recent years, Orlando’s industrial market — largely made up of last-mile delivery — saw an increase in the second quarter for rental rates and net absorption. This uptick in the velocity of product movement is enticing users to broaden their Central Florida supply chain models.
The result is that e-commerce is taking on a bigger share of distribution space as demand for other commercial real estate sectors slows down during this period.
In Central Florida, we’re seeing tenants asking for shorter terms for overflow, and looking into a future in which they will have to take on more real estate to accommodate “swing space” demand. Currently, the availability of big-box space in the Orlando and Interstate 4 market is low, driving users to seek space west to Lakeland and north to Ocala. However, there are projects under construction, such as our Distribution 429 in Ocoee, which will produce more than 400,000 square feet of Class A industrial space in the very near future. This pairs with the firm’s Infinity Park, a 1.3 million-square-foot logistic and distribution facility co-developed with Tavistock Development Co.
Contrary to other sectors in commercial real estate, e-commerce demand is driving industrial real estate absorption. According to recent market reports, the Orlando market generated appreciably strengthened sales volume in the second quarter of 2020. During this quarter, REITs were the most active buyer of industrial assets in the Orlando market followed by private buyers at 22.9 percent, then institutional buyers at 7.8 percent.
Orlando’s industrial market finished out the second quarter with a net absorption of 758,046 square feet. Significant move-ins include Coca-Cola taking 380,000 square feet in the Northwest Orange submarket and Lasership moving into 93,302 square feet in the Southwest Orange submarket at Infinity Park.
Due to increased construction, the overall vacancy rate stood at 8.1 percent, up 70 basis points from the previous quarter and an increase of 190 basis points year-over-year. Demand over available supply has the direct average asking lease rate for the second quarter at $6.88 per square foot, a $0.09 increase year-over-year.
The silver lining for commercial real estate during this pandemic is the logistics and distribution space. Industrial real estate has not felt the economic pressure that we have seen with office, retail and hospitality. There is no shortage of demand, and leasing in the Southeast markets remains brisk. Triple net rates continue to hold firm and free rent remains stable. Property values continue to increase, as seen in recent asset sales.
If anything, the market went quiet in March as many contemplated potential outcomes. The reality is that this period created sizable pent-up demand as institutional capital yearned for yield. Together, with a surge in domestic inventory, this could spur demand for U.S. logistics warehousing space.
— By Steven McCraney, president and CEO of McCraney Property Co. This article originally appeared in the August 2020 issue of Southeast Real Estate Business.