Supply Chain Demand Is Here To Stay

SAN FRANCISCO—COVID-19 and its associated forces, global lockdowns, financial safeguarding and supply chain disruptions, delivered a blow to all industries, including the industrial and logistics real estate sector. But in the second half of 2020, demand for industrial real estate has not only recovered, it has increased.

To understand the new configuration of the market and the unshakable strength that lies ahead, it is important to consider the intricate forces of the supply chain market, the differences between regions and types of real estate, and the new avenues for post-COVID demand, says Zain Jaffer, founder and CEO of Zain Ventures.

All signs point to unwavering demand for distribution spaces, even amid a global recession. CBRE’s midyear review of the global real estate market names three main sources of demand in the logistics industry: e-commerce, safety inventory and improved supply chain strategy.

As the official COVID-19 pivot, e-commerce sales are through the roof across the globe and will likely stay that way. Retailers everywhere are preparing for a greater percentage of goods and services to be found and acquired online. A trend that was already on the rise, CBRE compared e-commerce as a percent of total retail sales in the 10 countries with the highest retail output: the 17% figure from 2019 is projected to increase to 21% by 2021 and a whopping 39% in 2030.

One new entry to the e-commerce economy is the grocery sector. A huge spike in demand is coming from grocers pivoting to sell food and beverages online, fueling the need for new storage strategies. Grocery retailers are preparing for a future in which the supermarket diminishes as a point of interaction, as more consumers acclimate to having groceries delivered. CBRE predicts that medical, data providers and national third-party logistics providers will introduce similar low-risk demand, according to Jaffer.

“Safety inventory is a COVID invention, born from the erratic consumer behavior and the unforgettable inefficiencies in supply chain processes that the virus has exposed,” Jaffer tells GlobeSt.com. “Business owners are choosing to increase their stock in storage, holding more ‘safety inventory’ to respond to backlogged consumer demand and to prepare for any future supply chain disruptions. This mass increase in inventory will also drive demand for warehouse space.”

Lastly, the necessary adaptations to supply chain strategy are driving new demand in the market. Holes have been poked in the multi-tiered supply chain set-up, where one warehouse depends on another. A strategy already complicated by trade tariffs and labor costs, many retailers are moving to an omni-channel approach and diversifying manufacturing facilities. These changes in favor of supply chain resilience will decentralize the market and drive demand in new places, says Jaffer.

“Market interest is drifting away from Mainland China and toward the industrial markets of Asia, Europe, Mexico and the United States. More retailers are adding omni-channel facilities outside of China in addition to operations already in place,” Jaffer tells GlobeSt.com. “In CBRE’s market report, industrial markets near populated areas are predicted to demonstrate high resilience throughout the recession. Second and tertiary suburban markets might absorb some of the short-term shock as areas more dependent on localized economies, but these too are expected to recover and provide high-yield opportunities to investors interested in a longer game.”

Demand is also expected to differ across property type but larger big-box space has been named by CBRE as the safest bet. The greatest rise in US demand is predicted to be in class-A space. Secondarily, demand from new industries such as e-commerce grocery might drive the need for more final-mile warehouses and distribution centers, facilities where goods remain until delivered to a final customer destination. Heightened interest in these spaces might drive redevelopment projects in the coming years, making modernized urban distribution spaces an asset in the post-COVID market.

One of the sectors faring particularly well is the Bay Area. As active construction continues in the area, all major projects underway are finding tenants, and submarkets have maintained strong occupancy rates despite thousands despite thousands of new square feet being added to the market. The positive unit assumption rate is expected to continue into 2021.

In fact, nearly all of Northern California is performing well in the industrial sector. Leasing activity is two-fold. Major construction projects of big-box class-A space are underway and being introduced to the market at a high level of competition. Additionally, larger companies are leasing partial or entire smaller warehouses for retailers that are newer to the e-commerce model or that might need smaller warehouse space. Amazon, for example, recently committed to leasing a 202,000-square-foot delivery station in one of its buildings in the Napa Logistics Park.

In Oakland, vacancy rates in first quarter remained low: 2.3% and 6% respectively. A sizable increase in e-commerce sales can be largely attributed to sales in grocery, food and beverage. With pressing demand for cold-storage, retail demand warehouse and distribution center space remains high. Demand is also rising steadily from third-party logistics companies and technology companies. Retailers pressed to acquire space in response to a spike in e-commerce sales are anticipating that need to be permanent as higher levels of online orders are expected to outlast the duration of the COVID-19 pandemic.

“In short, supply will play a crucial role in the post-COVID market, and demand for warehouses and distribution centers is only on the rise,” Jaffer tells GlobeSt.com.

Zain Ventures is an investment firm with more than $100 million in assets under management. The company operates a variety of commercial real estate initiatives across the United States with a current portfolio of 21 projects in 11 states plus Washington, DC.