LightBox: Industrial Emerges as Strongest Commercial Real Estate Sector During Pandemic
NEW YORK CITY — The industrial sector has emerged as the strongest commercial real estate sector during the COVID-19 pandemic, according to a June LightBox report that updated information from the annual RCM/Lightbox — SIOR report. The surge in consumers buying goods and groceries online has fueled the demand nationwide.
“Clearly, no commercial real estate asset class is immune to the immediate and long-term impact of COVID-19, a black swan event unlike anything anyone has experienced,” says Tina Lichens, senior vice president of broker operations at LightBox. “Industrial real estate, however, is in the best position to return to a place of strength once we get past the short-term pain and uncertainty.”
New York City-based LightBox laid out five trends to watch in the industrial sector as the pandemic continues to grow in the country:
1. Investors return to core markets: Erik Foster, principal and head of industrial capital markets for Avison Young, expects the money to flow into stable core markets such as Chicago, the Inland Empire, New York/New Jersey and Dallas. Foster points to a May review by Avison Young showing rent demand surrounding last-mile facilities in city cores was 20 to 40 percent higher in markets like Chicago, New Jersey and Nashville.
“There is a significant rent differential in some last-mile locations across the country and we see this continuing at varying levels as consumer demand and market conditions dictate,” says Foster.
2. Online food and grocery volume doubles: Food delivery doubled from 20 million households in February 2020 to 40 million in March, and 40 percent of those consumers were first-time online shoppers who will likely continue to order online, according to CBRE research. This could lead to a 75- to 100 million-square-foot increase in demand for freezer cooler space over the next five years.
3. Demand for data centers increases: As millions of Americans continue to work remotely, Geoffrey Kasselman, partner and senior vice president of workplace strategy at CRG, says there is a notable shortage of mission critical space. Companies need extra bandwidth and data throughput, along with backup storage, to support operations during shelter-in-place directives.
“With [more people] working remotely, many companies didn’t initially have enough infrastructure to operate, which has unmasked notable capacity shortages in the data center market,” says Kasselman.
4. Increased leasing for “insurance” warehouse space — to boost close-in inventories. This stockpiling of inventory could increase demand for warehouse space by 5 percent — or 500 to 700 million square feet over the next five years, according to CBRE.
5. Expansion of onshoring: Concerns over supply chain disruptions are shaping leasing decisions, says Anthony Lydon, national director in JLL’s Phoenix office.
“Each CEO and CFO of a company whose operations are deeply rooted within the supply chain is taking a risk-management mindset, looking at what level of ‘insurance’ is needed,” he says. “Companies will still source materials from outside of the U.S., but many are looking to set-up back-up operations here.”
The LightBox report projects rent and sales prices in the industrial sector could rise 5 percent nationally after the market stabilizes. Jack Fraker, vice chairman and managing director of capital markets at CBRE, projects the following increases:
- top West Coast markets (Los Angeles and Inland Empire, for example) and New York/New Jersey could jump 7 percent;
- Chicago, Dallas and Atlanta might rise 5 to 7 percent; and
- strong secondary markets such as Charlotte, Nashville, Indianapolis and Columbus could see a 3 to 5 percent increase.
The industrial sector’s growth projections for e-commerce and supply chain realignment provide a solid foundation for a resurgence in activity later this year, particularly in core markets, according to LightBox.
“The good news is that the industrial markets were very healthy going into this crisis,” says Mark Duclos, SIOR 2020 president and president of Hartford, Conn.-based Sentry Commercial. “Some markets were overheating, but we saw the highest overall rental rates in the country and the highest occupancy rates in history for the industrial sector.”
— Alex Tostado