Manufacturing Companies Are The Have-Nots of Industrial

This year, industrial has stolen the show in the commercial real estate market. The pandemic fueled massive growth in online shopping, catalyzing a surge in ecommerce-related industrial activity. The traditional manufacturing industrial users, however, tell a different story. This industrial segment has been impacted in the same way as other assets and businesses during the pandemic. Investors gunning to acquire industrial properties should note the bifurcated market.

There is a have and have not in the industrial world, not just in the sale and leasing market but also in terms of who is going to give up space and who is not going to make it,” Jonathan Needell, president and chief investment officer of KIMC, tells GlobeSt.com. “

Among the warehouse deals, Needell has also seen an increase in sale-lease back deals or manufacturing deals with what would typically be considered strong manufacturing tenants. “We have seen some investment-grade credit with traditional users on properties come up and we have seen some sale-leasebacks, which is kind of rare. I think that goes to the fundamental stress in those typically more industrial-focused users that are not operating normally,” he says. “An investment-grade credit tenant doing a sale-leaseback is probably going to make it.”

The retail market segment is also having a negative impact on industrial. Many large-box retailers use industrial space or leverage industrial space for the ecommerce portion of their business. “We have also seen a lot of retailers go bankrupt, and many of them were using industrial space, not just using third-party logistics for distribution,” says Needell, who expects to see more space from these users come to market.

As retail stores shutter, there is also an opportunity for some major online retailers to eschew last mile industrial in favor of vacant retail spaces. “There is a convergence of industrial rents on the high end for logistics users and rental rates for large-box retail,” adds Needell. “At what point do logistics companies figure out that they can track inventory electronically in big-box retail spaces that can serve as a last-mile distribution center. For a retailer like Walmart that has always been omnichannel, that has been a real option. There is a lot of activity in the efficiency piece right now.”

Ultimately, the have-not side of the market should temper exuberance around industrial, particularly for more traditional product. “There are a lot of crossroads in industrial right now,” says Needell. The one that people are paying attention to are these super low cap rates for ecommerce-related tenants, and people are saying that industrial is going up. I think that you have to be a little more weary than that.