The response to the outbreak of COVID-19 is unprecedented in scale and has led to personal concerns and economic uncertainty that is effecting all of us today. Although our immediate focus remains on social distancing and being part of the solution, we know that this time shall pass and when it does those of us with interest in the industrial real estate sector will have exceptional opportunity.
Short Term Opportunities
After 6 weeks of intense isolation China is beginning to recover. People are going back to work and international supply chains are being rebuilt. The wave of delayed orders being fulfilled along with standard Q3 inventory build-up will lead to additional space requirements to accommodate unusually heavy inventory. 3PLs will shoulder much of this burden and be especially in need of additional space.
This is a health crisis, not a liquidity crisis. Debt is abundantly available. Loan to debt ratios are high and owner-occupiers can refinance to record low rates and/or lever up to improve their immediate cash position. Investors can refinance or acquire properties at far greater yield spreads than a month ago.
Construction will be slowed by delays in the municipal permitting process and social distancing limitations for onsite crews. Although a concern to speculative industrial developers, those that control available existing product will be able to meet the immediate needs of space users and push rents in an already tight market.
Long Term Opportunities
E-commerce accounted for 14% of total retail sales prior to the COVID-19 outbreak. That robust trajectory will grow at a far faster pace now as virtually all consumers have been forced to alter their buying habits. The push for near-shoring manufacturing operations will get stronger as concerns over international supply chain disruption will not be forgotten. Extremely lean inventory levels will be reconsidered. All are major drivers for increased space needs.
Available labor has been a headwind to industrial real estate growth. Retail’s loss is industrial’s gain where displaced workers with similar compensation structures will move to fill outstanding industrial positions and fuel growth.
Food delivery and cold storage uses were already struggling to find adequate space to fill their growing requirements. Their growth will be exponential and speculative or repurposed facilities that can accommodate that type of use will be absorbed quickly.
Investors of all kinds will look to industrial real estate as an asset class that is far less volatile that equities, provides far greater return than the bond market and may utilize projected rent growth to far outpace the inflationary pressures that could occur due to the Fed’s quantitative easing practices. Further, institutional portfolios will likely re-balance their asset-mix mandate away from equities and towards real estate which will further increase pricing and compress cap rates.
Opportunities will abound when we get to the other side, stay safe and remain positive.
Written by: Mark C. Long, CRE, SIOR, CCIM, LEED AP and John F. Hassler, SIOR