Acceleration of online shopping during the COVID-19 lockdown has made companies more risk-averse in their inventory management strategies. Concerns about running low on ordered merchandise is causing a shift from “just in time" to “just in case” logistics strategies. Now, firms are increasing stock at facilities near customers to ensure timely shipping in case customers order more than anticipated.
While this new logistics approach is still in its infancy, Greg Healy, senior vice president, supply chain solutions & workforce analytics, with real estate services firm Colliers International, says “It’s impact on industrial real estate is nothing but positive.”
The increase in online shopping was happening prior to the quarantine, but the pandemic accelerated it, Healy says., For example, in 2018, 29 percent of Nordstrom sales were online, he notes, which is equivalent to sales at 146 stores, and six percent of Target’s sales were online, which is equivalent to sales at 122 stores.
Omni-channel retailers are downsizing bricks-and-mortar space and increasing their focus on online sales, but because customers no longer come to them, their biggest challenge is reducing the high cost of transporting products. As a result, retailers’ highest demand will continue to be for space at infill distribution facilities, according to Healy. But the need for resilience is also increasing demand for regional warehouse space where large quantities of consumer goods are stored.
“The shift to ‘just-in-case’ stock is driving industrial demand throughout the supply chain, not just last-mile,” agrees Miami-based Steve Medwin, executive managing director and co-lead of the industrial services division for South Florida with Newmark Knight Frank.
Few goods are stored in last-mile facilities as they are much smaller than regional distribution centers, he notes. “The bigger impact is being felt at the larger facilities where it’s feasible to store additional inventory,” Medwin says. “Naturally, more inventory leads to more demand for space and that demand is causing rental rates to increase.”
Depending on the market, rents for industrial space have remained steady or increased, says Maryland-based Mark Glagola, senior managing director for the Mid-Atlantic with real estate services firm Transwestern. He notes that “The top 11 industrial markets are all seeing rising rents, especially in class-A product and product close to urban cores.”
Phoenix-based James Breeze, senior director and global head of industrial and logistic research with CBRE, agrees. “While last-mile facilities are performing well, the bulk sector—buildings of 100,000 sq. ft. or larger—is performing the best, as many companies are looking to solidify their regional distribution capabilities and store additional products.”
The continued increase in demand is due to growth in online sales during the pandemic, Breeze adds. “Companies feel that many of these consumers will continue to buy goods online, and this will elevate e-commerce sales faster over the next few years—faster than was previously estimated. Much of the (current) demand for space is to prepare for this increase.”
Noting that overall U.S. imports are still down due to supply disruptions resulting from the trade war with China and now COVID-19, he agrees that an increase in safety stock is going to happen, but contends that it will be a slow and steady process that creates demand for industrial space in the long term, rather than immediately.
When COVID-19 spread to the U.S., CBRE predicted a moderate downturn in industrial demand, but demand remained essentially the same as pre-pandemic, rental rates continued to rise, and vacancy remained low, Breeze notes. As a result, the massive amount of new product under development—313 million sq. ft.—will likely be absorbed quickly.
More than 1 billion sq. ft. of additional industrial space will be needed by 2025 to meet surging demand for space, CNBC reported recently. That may be a low ball figure, as reshoring of manufacturing is also generating demand for industrial space, according to Indianapolis-based Pete Quinn, national director of Colliers Industrial Services-USA.
Since the trade war began, imports from China decreased by 7.1 percent, according to Healy, who notes that manufacturing is shifting to Southeast Asian countries, being reshored to the U.S, or near-shored to Mexico.
Reshored manufacturing is going to Southern and Southwestern “right-to-work” states, with access to ports and large labor markets, particularly North Carolina, South Carolina, Tennessee, Georgia and Texas, according to Quinn.
Houston, for example, is a hot market for reshoring activity, as it has a labor market that includes lots of tech-savvy energy workers who were laid off when oil prices dropped and may be willing to shift to “near-collar” careers, he notes—a term used to describe jobs that require systems-based tech skills, like in automated manufacturing plants.
While demand for space is rising, Quinn says developers will not be able to deliver more industrial product until they can get entitlements, which won’t happen as long as local government planning departments are closed. He suggests that this shortage will make demand for space so competitive it could result in bidding wars for available properties.
Both Healy and Quinn predict that vacant big-box stores and failed shopping malls will be converted or redeveloped to e-commerce distribution space. They believe that local governments will be agreeable to rezoning retail to industrial use when retail centers become unsuccessful.
Noting that the logistics sector is continually evolving, Glagola says, “One definitive change is the desire for what Amazon calls ‘sorting centers,’ close-in facilities with numerous dock doors and parking for the transfer of goods from tractor-trailers to delivery vehicles, such as vans and straight trucks.”
Sorting centers could also play a key role in the evolution of merchandise returns, which need further refinements, Glagola notes. Going forward, the increasing amount of reverse logistics will be a big demand driver for mature warehouses in low-rent markets, as e-commerce retailers seek cost savings, Breeze adds.
Breeze notes that all types of industrial real estate have been in high demand by investors since the end of the Great Recession. But “We have actually seen interest in industrial real estate increase over the past few months as investors, some of whom do not have industrial real estate in their portfolios, feel the sector is a safe haven to place capital, especially compared with other property types,” he says.
Much of investor demand has shifted to e-commerce distribution facilities, which are now critical to the consumer supply chain, according to Miami-based Nick Wigoda, executive managing director and co-lead of the industrial services division for South Florida with Newmark Knight Frank. “The fact that industrial space is so critical has propelled it to the top of investors preference list.”
“Investor demand, especially for core, urban infill with quality income, has never been stronger,” adds Glagola. As proof, he notes that his team recently sold a core, urban infill property in Washington, D.C. for record pricing.