Pandemic Accelerates Demand Trends for Industrial Property

Increased demand for industrial space, which has fared better than other real estate sectors during the pandemic, sets it up for more investment in the second half of 2020, according to a report from commercial real estate brokerage Marcus & Millichap.

The surge in online shopping due to the pandemic, along with renewed factory production and improvements in global trade in May and June, meant industrial real estate showed “encouraging performance” in the “volatile second quarter,” the report said.

Asking rents in most markets hit “a record high” during 2Q, thanks to tenant demand, newer buildings entering the market and tight supply. Based on preliminary 3Q leasing data, industrial tenants “are scooping up available square footage at a pre-pandemic pace,” according to Marcus & Millichap.

Investors seeking shelter from risk bought industrial assets over other property types in 2Q. Deal flow dropped about 40% on a quarterly basis in primary and tertiary markets, but investors showed appetite for properties in secondary markets amid an expected migration to lower-density locales, the report said.

Phoenix and Denver registered some of the highest transaction totals among non-primary markets. Other secondary markets like Minneapolis, with very low vacancy, and San Diego, a life science hub, also accounted for a sizable number of deals.

Manufacturers, retailers and merchant wholesalers maintained inventory levels for 2Q compared with a year prior–but panic buying at the pandemic’s onset has highlighted the limitations of maintaining only just-in-time inventory, which will benefit long-term demand for warehouse space, the report said. Retailers and suppliers have increased inventories of essential goods and medical products, it added.

Relatedly, the surge in online shopping in 2Q has increased the need for timely delivery. Grocers and retailers selling basic goods have started leasing last-mile facilities in cities and suburbs to shorten delivery times, according to the report.

Dollar General is leasing three cold-storage facilities to expedite distribution, while Albertsons, Shoprite and other regional grocers are deploying micro-fulfillment centers with highly automated order-picking, it said. Walmart and other large retailers that plan to offer subscription plans guaranteeing same-day delivery could also turn to last-mile warehouses.

Since land for fulfillment centers is scarce in high-population centers, there are opportunities to convert retail or office properties into single or multi-tenant industrial facilities, according to Marcus & Millchap.

Global supply chain disruptions from the pandemic also accelerated a longer-term trend toward increased domestic manufacturing instead of relying on imports, which could increase demand for production facilities.