How It Happened
Under stay-at-home orders, there was a dramatic shift in the retail supply-and-demand ecosystem. The retail real estate space recorded 159-million square feet in vacancies following more than 12,200 store closures in 2020. Much of that loss was reabsorbed into industrial, as brick-and-mortar shops embraced e-commerce, and existing digital retailers, wholesalers and logistics companies expanded their footprints to keep up with the online shopping frenzy.
Where digital purchasing accounted for approximately 15% of all consumer spending just a few years ago, online shopping ballooned to $861.12 billion in 2020 — a massive 44% jump from the year prior. E-commerce proved to be the primary driver in the 2020/2021 industrial boom and represented the largest volume of total leasing activity last year.
Where It’s Going
Recent surveys show that the majority of consumers prefer the Internet for their product needs. More than 256 million Americans shopped online in 2020 and that could increase to nearly 280 million by 2024. This puts added pressure on the industrial sector, which some experts predict will need one-billion square feet of space over the next five years to keep up with momentum. Net absorption is on pace to reach approximately 250-million square feet this year alone. Availability of industrial real estate stock continues to be tight, prompting operators to become more creative with existing assets, including adaptive and conversion projects of other CRE types for industrial use. New industrial development will help ease the tension with approximately 340- to 370-million square feet in the pipeline, followed by a 29% increase in new completions next year.
Changes Ahead
If the COVID-19 crisis has taught us anything, it’s that flexibility is crucial to resilience. Supply chains were severely disrupted (a recent survey conducted by Ernst & Young LLP showed only 2% of companies said they were fully prepared for the pandemic), creating a massive supply backlog globally. Looking ahead, companies are rethinking their supply-chain strategies to be more collaborative and inclusive so that if something unexpected — like another pandemic or a ship gets stuck in the Suez Canal — does comes up, they can swiftly make appropriate modifications to ensure business continuity. For industrial asset owners and operators, this means demand for adaptive and flex space should gain traction.
Another change to watch for is the shift toward a “live, work, play” environment. Following the lead of its office counterpart, expect industrial assets to take on a human-centric approach and integrate more lifestyle amenities (i.e., fitness centers, childcare, food and beverage) at the property level to create a unique tenant experience and an overall more productive working environment (remember that saying “happy employees are productive employees” – as much as 13% according to some studies).
As with all businesses, heightened awareness of safety and health measures will continue to be important, escalading the need for high-tech advancements and optimal ventilation and operating systems within an industrial setting. And because the cost of doing business has increased dramatically in recent months, special attention may be given to sustainable and environmentally conscious industrial buildings.
Investors Are Moving In
Industrial real estate is red-hot with investment activity for various reasons: 1) demand is strong and almost appears to be impenetrable; 2) asking rents have reached recorded highs, up 7.1% annually; 3) vacancy remains low; 4) ROI is historically strong for industrial properties and should be more so in today’s environment; and 5) there is plenty of opportunity for non-institutional players to pick-up industrial assets near logistics hubs.
Overall, industrial real estate investment activity increased 10.6% in 2020 and 10.9% during the first two quarters of 2021, with sales prices jumping more than 20% year-over-year. For example, KBS recently sold Southpark Commerce Center in Austin, Texas for a substantial amount.
2020/2021 has been quite the journey for the industrial real estate sector, which will continue to be a bright spot within CRE. The big question is how long will this momentum last and how will that impact the rest of CRE? For now, indicators suggest nothing but growth.
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