While other sectors of the real estate market have taken hits due to COVID-19, industrial land has continued to see demand driven by the need for warehouses and distribution centers that can handle storage, sorting, re-packaging, and distribution of e-commerce products and other goods.
The pandemic has only served to highlight the strength and resilience of the industrial real estate sector. Even before the pandemic hit, industrial real estate had been outperforming all other property types for the past 20 years.
Q2 2020 net absorption was a positive 19.2 million square feet, marking industrial real estate’s 41st consecutive quarter of positive net absorption. Most recently, August 2020 leasing activity outpaced the monthly average of the past five years by 13% as companies likely adjusted to the ongoing shift to online shopping.
This continued strong performance is likely to be welcomed by investors in industrial real estate, who will be looking for stable and secure investments in these uncertain times.
E-Commerce
The main reason the industrial real estate sector outperformed other sectors is because e-commerce is growing rapidly. Also, there’s an increasing demand for warehouses and other types of storage to handle all the online orders.
The retail landscape has been changing for years, and this is largely due to demographic shifts. They are also changing the way that consumers prefer to shop. Particularly given that more and more millennials become the largest population group.
In a 2019 survey, 65% of millennials said they would rather make purchases online than in-store. This preference is likely to continue driving e-commerce growth in the years to come. Also, given the fact that millennials have not yet reached their peak income age.
The pandemic has forced many consumers to change their habits and do most of their shopping online. In Q2 2020, e-commerce sales surged by 32% while department store sales dropped by 15%. This is a trend that is likely to continue as people become more and more comfortable buying things online.
Traditional retailers are aware that they need to update their methods in order to keep up with the times. With the second quarter of online sales growth via Amazon, Walmart – the second largest e-commerce company – saw an increase of 97% year-over-year.
With the requirement for more industrial space to store and handle goods, retailers are forced to change their ways. This is done in order to better serve their customers in more urban markets. By expanding their own last-mile logistics facilities or outsourcing to third parties, retailers can provide a more efficient service.
E-commerce retailers are working tirelessly to meet the high expectations of today’s consumers who want more product options, a seamless user experience, and ridiculously fast delivery – all without breaking the bank.
In order to make same-day delivery possible, these retailers have had to secure real estate closer to population centers. As opposed to only locations near major transportation hubs. Furthermore, they need extra warehouse space to handle exchanges and returns. It actually takes up 20% more space than traditional outbound goods.
Industrial Land Outlook
The industrial real estate sector is expected to grow along with e-commerce, as the retail landscape continues to shift. The trend towards faster and more efficient distribution is a logical outcome of retailers’ race to reach consumers faster and at lower cost.
Though there is a healthy demand, there is still a lack of updated space that many e-commerce tenants are searching for. Newer facilities usually require a minimum of 28’ clear heights in order to make the most out of the storage volume for goods that need to be sorted, repackaged, and sent to their next destination. And the clear heights continue to grow, with some grand distribution centers having 36’ or more.
Although the demand for office space is still strong, the construction of new office space has fallen since the pandemic started. This is because37% of construction projects have been delayed or canceled since Q2 2020. With less new office space being built, the rental market will remain strong. Then, landlords will continue to have an advantage.
Industrial Land Investing Approach
The industrial property sector is very attractive to investors. This means that there is a lot of demand for existing industrial properties. This results in competition among institutional investors to acquire these properties. It then drives up prices for industrial REITs (Real Estate Investment Trusts).
In fact, the pricing of industrial REITs implies a 17% premium to private market pricing. This is compared to a 14% discount for multifamily REITs and a 23% discount for office REITs. Before COVID-19 put a halt to business transactions, there was a steady increase in activity. With $89 billion in industrial deals in 2019, compared to $74 billion in 2018 and $56 billion in 2017.
This increased investor demand, combined with a limited supply of properties available for sale, has made pricing on industrial properties very competitive. As a result, it’s become more difficult to generate value-add returns by buying existing stabilized industrial properties.
Key Takeaway
The e-commerce industry is booming and is only expected to grow, meaning that the industrial land sector will continue to see strong performance as businesses scramble to meet the demand for cheap and fast delivery. This trend towards efficient distribution should persist as merchants strive to meet customer expectations.
