COVID-19 Will Drive Changes in Industrial Real Estate

In response to the coronavirus crisis, supply chains will change—and the industrial market will change along with them.

Supply chain disruptions caused by the pandemic are expected to increase demand for warehouse space and, at the same time, drive lasting changes in storage and logistics. Additionally, increased attention to supply chains will likely spur companies to address circumstances that interfere with their reliability and functionality.

Now and in the foreseeable future, distribution of goods is volatile and the industrial sector is imbalanced.  Virus-induced business shutdowns have curbed some activity while causing producers of staple goods to scramble for additional warehouse capacity.  Stay-at-home orders have shifted consumer purchasing online.

Even as states begin reopening, this consumer behavior may persist, causing a need for more warehouse space in the last-mile delivery zone. Chicago, South Florida and many other real estate markets stand to benefit, although COVID-19’s impact on populous areas could be a future site selection consideration for warehouses.

Cold storage facilities will see a significant rise in demand, as people have grown accustomed to buying groceries online and dining at home.

In response to shortages, companies may shift from a lean-inventory strategy and position more safety stock around the country, a move that calls for additional storage space and not necessarily just in the short term, the Wall Street Journal reports. Land on which to build new warehouses will of course become valuable and attractive as an investment.

The WSJ said that companies that connect businesses with warehouses with space to share are seeing a surge in demand from retailers and direct-to-consumer brands overwhelmed by online orders for products like cleaning supplies.

COVID-19 and the global supply chain breakdown may have accelerated the timeline for manufacturers and retailers to embrace new technologies. They already have the capacity to leverage artificial intelligence and big data to get a firmer hold on how much they should be making and ordering in response to real-time inputs. Down the line, we may see warehouse automation coordinated with drone delivery for fulfillment efficiencies and safety concerns. 

Firms need to develop new processes “to shorten disruption detection time, forge new types of partnerships to overcome supply shortages …develop better regional demand sensing, (and) automate … to minimize human-to-human contact and to deal with potential labor shortages,” according to Crain’s Detroit. Firms should also build redundancy and flexibility into supply chains. Otherwise, stores face shortages of household essentials like toilet paper and milk, while on the other end producers have surplus capacity “due to the inflexibility to switch production from commercial to consumer products,” the report added.

In response to the coronavirus, many companies have already begun to diversify sources for components or finished products to be less dependent on Chinese production. But it will take time to modify logistics and transportation routes and build alternative fulfillment facilities to make those changes. Supply chains also could get shorter as manufacturing facilities move closer to final markets.  

Industrial real estate was generally strong before the coronavirus, but its continued success is counterbalanced by problems that will persist. The hospitality industry will be slow to recover, so warehouse distribution to hotels and restaurants will languish as a result. Soft goods will pile up as retailers shutter or trudge the road to recovery. As with any high-stakes situation, there will be winners and losers. Overall, the industrial sector is more resilient to the pandemic and its fallout than most others.

Chris Roach is the CEO of BBG, a national due diligence commercial real estate firm.