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Industrial resilience: Navigating the U.S. industrial market amid COVID-19 impacts

By Tom Philbin (Chicago)

More than any other asset class, industrial real estate assets impact business performance. Securing the right facilities has always been critical, but COVID-19 (coronavirus) is changing the global landscape. Though market impacts continue to evolve, shifts in company priorities indicate that trends in the market prior to the global health crisis may accelerate. A move toward de-globalization and the effect of consistently low interest rates may show up prominently in the industrial sector.

Deals are getting done, but velocity is slowing 
Currently, there is still market activity. Deals that were in the pipeline and under contract prior to the rapid spread of the coronavirus outbreak are continuing to close. That is expected to hold over the next couple weeks, but eventually the velocity will slow. Interestingly, this period of uncertainty has also resulted in some tenants exercising renewal options with their landlords if their leases were set to expire soon.

Firms that invest throughout the capital structure note that while the last time we saw a similar distress situation was the 2008 financial crisis, there are significant differences. Mainly: today’s banks are strong. Risk and leverage exist in most funds. Who will come into real estate when distress hits remains to be seen as the long-tail impacts of the current disruption on real estate are too early to predict.

This is an unprecedented time where there is shallower pool of buyers and many are in a “wait and see” mode, but when we emerge from the current health crisis, people will still need space and will still need to lease industrial.

Impact of low interest rates 
“Lower for (even) longer” had been the mantra for investors prior to the current health crisis. In March, the U.S. Federal Reserve effectively cut interest rates to zero, its most dramatic step since the financial crisis to bolster the economy in the face of coronavirus.

And while some sectors face real capital challenges at present, financing an industrial deal is one of the perceived “safe” bets for banks right now. And all indications are that interest rates will remain low.

The 12-bsf U.S. industrial market recorded exponential supply growth last year, as it adapted to the modern requirements of occupiers. Last-mile logistics are fueling more adaptive reuse projects and urban-centric industrial occupancy patterns.

Core is king 
While there is no doubt that specific sectors like gaming, retail and hospitality are particularly hard hit, there are some potential resilient sectors as the market’s needs shift. Core is king and industrial, particularly e-commerce, storage and data warehouses will hold up well.

This is in part driven by a growth re-shoring, which will likely be accelerated by the impacts of COVID-19 as it continues to reshape the global landscape. Recent trade agreements and tariffs enacted in 2019 and 2020 continue to drive this shift. According to a February 2020 Bank of America report, a “tectonic shift” is about to bring supply chains and jobs back to shores that exported them in previous years. In line with BofA’s views, automation and industrial are two sector areas where we see investment opportunities. This is all before the current pandemic.

Nearshoring has a commercial imperative; it enables shorter delivery times and greater localization of products, allowing companies to meet consumer demands and react to trends more quickly. The so-called “Amazon effect” has been heightened in today’s present landscape and will only continue to root itself in how we live our lives. Industrial will be where the rubber hits the road in helping facilitate the last-mile delivery of goods.

Between 2008 and 2019, more than 2,000 new establishments classified as either warehouse or storage were added to the U.S. market, according to the Bureau of Labor Statistics. This growth has not been enough to keep pace with the increase in demand for these types of industrial real estate spaces.

As we emerge from the current health crisis, increasing the inventory of urban industrial space may be more important than ever as providers look to speed time of delivery to the consumer. Warehousing will need to be located closer to the consumer to control the supply chain and enable last-mile delivery. Consequently, industrial could come out stronger than ever.

Tom is the Global head of Industrial Brokerage for the firm's industrial service line. 

The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such. While information in the article is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. The spread of COVID-19 and the containment policies being introduced are changing rapidly. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak, such as the World Health Organization, Government of Canada, U.S. Centers for Disease Control and Prevention, UK Government, and Johns Hopkins University COVID-19 Case Tracker.