As published in National Real Estate Investor
The coronavirus pandemic resulted in unprecedented disruption to the global supply chain. Food suppliers couldn’t get product where it needed to be to reach consumers. Retailers and e-commerce businesses ran out of essential goods such as toilet paper at the first whisper of stay-at-home orders and couldn’t restock because primary suppliers were shuttered. American manufacturers couldn’t access raw materials and key components for the same reason.
As stay-at-home orders began to expand, manufacturers found themselves temporarily closed. Distribution facilities opened and closed repeatedly in reaction to staff COVID-19 exposures. As stay-at-home recommendations begin to lift and the American business world tries to figure out what a new normal will look like, the real estate sector is asking the same question as everyone else: What’s next?
Manufacturing in a Post-Pandemic World
The pandemic hit manufacturing hard. Manufacturing in 2020 contracted at levels not seen since 2009 in the middle of the Great Recession. However, a number of indices registered positive movements in May.
The level of supply chain disruption generated by the pandemic may be a boon for manufacturing real estate growth. As businesses begin to slowly recover from coronavirus-related closures, they are faced with the challenge of restructuring supply chains to mitigate the risk of similar disruption in the future. For many, this means reshoring operations and regionalizing suppliers—both of which could strongly benefit the industrial real estate sector.
Distribution and Fulfillment Should Shine
While logistics operations had their fair share of hurdles during coronavirus, most came out on top. Consumers flocked to online shopping for goods ranging from groceries to exercise equipment, quickly draining nationwide fulfillment operations that had come to rely heavily on Just-in-Time (JIT) inventory practices.
JIT inventory methodologies save money by enabling retailers and distributors to hold less inventory. In a post-pandemic world, however, these same logistics stakeholders have seen the downside of holding minimal inventory. Retailers and manufacturers alike are now building redundancies into their supply chains and expanding capabilities to accommodate higher inventory levels of raw materials, in-demand consumer goods, and more.
In addition, the e-commerce sector—online grocery in particular—will hold onto much of the market share they’ve acquired during the pandemic. These trends will undoubtedly drive continued growth in industrial real estate as logistics providers, e-commerce businesses, traditional retailers, manufacturers, and other stakeholders strive to shore up their warehousing and distribution networks.
Where Do We Go From Here?
It’s difficult to accurately predict what will happen in industrial real estate. As we pass the initial wave of coronavirus, commercial and industrial real estate firms have begun to see patterns emerging, such as increased demand for distribution space. But the future is unpredictable. There may be additional waves of coronavirus to contend with, which could slow or halt the growth and the construction activities required to facilitate it, meaning that rents on existing space could quickly trend upward.
Like many industries right now, industrial real estate growth is somewhat fluid. If trends stay on their current track, however, the industrial real estate sector should post steady and reliable growth for the foreseeable future.
Phoenix’s affiliate companies hold interests in approximately 30 million square feet of industrial, retail, office, and single tenant net-leased properties across 22 states. Phoenix principally specializes in the renovation and repositioning of large, former single tenant industrial facilities throughout the United States that were previously owned by major corporate clients, REITs, or financial institutions.
Frank P. Crivello is the Chairman & Founder of Phoenix Investors, a national real estate firm based in Milwaukee, Wisconsin.