The COVID-19 pandemic hit many sectors of commercial real estate hard, with some sectors such as hospitality and retail only recently beginning to exhibit signs of recovery. Industrial has been the undisputed leader in commercial real estate throughout the pandemic, largely thanks to an unprecedented boom in e-commerce that has driven skyrocketing demand for more warehouses and fulfillment centers.
Now — about a year and a half into the pandemic — real estate owners and investors have begun to look forward to a post-pandemic world while still trying to solve the challenges posed by the ongoing reality of COVID-19. Here are some issues related to COVID-19 that still impact the industrial real estate sector.
E-Commerce Shift is the New Normal
As shoppers moved online to make their purchases safely from the confines of their own homes during the global health crisis, the shift to e-commerce accelerated by about five years almost overnight. Though initially unclear about whether online sellers would retain this market share, continuing e-commerce growth in 2021 suggests that the increases in online shopping aren’t going anywhere.
This trend has major repercussions for industrial real estate as omnichannel and e-commerce retailers seek fulfillment space than can accommodate their higher online order volumes. Some projections have placed demand for additional industrial real estate at more than 1 billion square feet by 2025.
Port Congestion Driving Industrial Real Estate Demand
As e-commerce sellers try to keep goods in stock and recovering brick-and-mortar retailers strive to fill their shelves as more consumers come back to stores, massive restocking orders sit in limbo at virtually all major U.S. ports. The port sector has been hit with a perfect storm of issues beyond increased import volumes, including a massive shipping container shortage and problems with COVID-19 infections among longshoremen, dockworkers, and trucking/drayage drivers.
Industrial real estate demand near U.S. seaports has escalated steadily alongside these crises as retailers and logistics providers seek to quickly remove freight from docks and get it into the distribution pipeline. Vacancy near major seaports is below two percent in New Jersey and Southern California, for example, and rental prices for space near seaports continue to climb at record rates.
Retail-to-Industrial Conversion Opportunities Arise
The damage COVID-19 caused to the brick-and-mortar retail sector has created additional opportunities for property owners or investors that want to salvage something out of failing properties. This trend has been particularly noticeable with Amazon since the retail giant has purchased dozens of conveniently located shopping malls for conversion to distribution centers.
While retail-to-industrial conversions will never be a primary means of creating new inventory for industrial tenants, it’s likely that we’ll see more repurposing of this nature in the short-term due to higher demand for warehouses and higher incidences of failing retail properties. Given the challenges and costs associated with these conversions, however, this activity will likely remain limited to Amazon and other large organizations that can afford to sink money into the projects.
Reshoring Finally Becomes Reality
Reshoring initiatives have been gaining speed since around 2016 as costs for manufacturing in China began to rise. The Trump administration’s trade war, followed by the COVID-19 pandemic, accelerated reshoring plans for many American organizations. In July 2020, two-thirds of respondents to a Thomas Industrial survey reported that they were looking into bringing production back to North America, and 33% of businesses told Gartner they planned to move out of China by 2023.
Pulling up stakes and moving equipment and resources to a different country takes time, but reshoring efforts have begun to produce some tangible results. For instance, Walmart recently announced it would spend $350 billion by 2030 on “items made, grown, or assembled” in the U.S. and launched its “American Lighthouses” plan to identify and remove barriers to sustainable American production. As more retailers, manufacturers, and logistics operators make moves to regionalize manufacturing and logistics assets in the wake of COVID-19, reshoring efforts will have an increasing impact on industrial real estate.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.