Industrial Real Estate Profits From Stay-at-Home Buying

The coronavirus disease and resulting COVID-19 pandemic has provided a boost to industrial real estate.

So says a special report from Marcus & Millichap called “Beyond the Global Health Crisis.”

Shutdowns, shelter-in-place orders and general staying at home patterns have heated up demand for last-mile inventory warehouse space and domestic manufacturing facilities, according to Erik Pisor, the research analyst who prepared the report.

“The industrial market enters the second half of 2020 well positioned to record increased demand for available space and inflows of investor capital,” Pisor said. “Supported by a surge in online spending, renewed factory production and global trade improvements in May and June, the sector registered encouraging performance during the volatile second quarter.”

Pisor said that 30 million square feet was absorbed across the country during that three-month window. In addition, more than 2,000 new leases were signed for spaces larger than 10,000 square feet.

However, more than 70 million square feet of space went on the market at the same time. That caused a 30-basis-point uptick in quarter-over-quarter vacancy. “Still, the vacancy rate ended June 100 basis points below the 10-year average of 6.5 percent, backed by half the nation’s major metros recording a decline or nominal gain in second quarter vacancy,” Pisor said.

“The combination of tenant demand for available space and tight conditions benefited average asking rents in most markets from April to June, pushing the national marketed rate to a record high,” Pisor said. “Asking rent growth may further elevate during the remainder of the year as preliminary leasing activity for the third quarter suggests industrial tenants are scooping up available square footage at a pre-pandemic pace.”

Pisor said industrial real estate is looking like a safer option to investors at the moment.

“Bullish on the stability already demonstrated by the sector, investors with a focus on minimizing their risk exposure pursued industrial assets over other property types during the second quarter,” Pisor said. “Private buyers remained comparatively active across the nation, as most sales fell in the $1 million to $10 million price tranche, netting a mid-7 percent average cap rate.”

The report included data for markets around the country.

The pandemic is also bringing an increased focus to domestic manufacturing that will ultimately benefit industrial real estate.

“While U.S. export and import volumes were encouraging in June, the global supply-chain disruptions that emerged at the beginning of the second quarter accelerated organizations’ reshoring plans. The growing number of companies considering this supply-chain realignment indicates rising user demand for automated production space may be on the horizon,” Pisor said. “While U.S. export and import volumes were encouraging in June, the global supply-chain disruptions that emerged at the beginning of the second quarter accelerated organizations’ reshoring plans. The growing number of companies considering this supply-chain realignment indicates rising user demand for automated production space may be on the horizon.”

At the same time, grocers and discount stores have been bolstering their distribution presence near households. “The increasing usage of online platforms for shopping during the second quarter has expedited consumers’ order processing expectations,” Pisor said. “In response, grocers and other necessity-based retailers with an omnichannel presence have begun to lease supplementary last-mile facilities in both urban and suburban settings, allowing these companies to shorten the order-to-delivery window.”

The bottom line is that properties near population centers able to handle high volumes of merchandise, particularly perishables, have seen rising demand from grocers and discount retailers. And Pisor forecast more of that ahead.