Originally published in NREI’s 2020 Midyear Outlook, page 29
The COVID-19 pandemic put the supply chain in a state of disruption. Retailers struggled to stock shelves, non-essential manufacturers were forced to shutdown or shift manufacturing to essential items, and food suppliers had to shift distribution away from closed restaurants and toward consumer outlets. Even retail and e-commerce giants such as Walmart and Amazon—largely considered to be at the top of the logistics game—ultimately ran out of in-demand items like toilet paper and cleaning supplies.
Even now, shortages of goods continue to strain the supply chain. The general state of upheaval has made the long-term impact of the novel coronavirus on the industrial real estate sector difficult to predict, but projections suggest industrial real estate may recover quicker than most. Even amidst uncertainty, commercial real estate and third-party logistics (3PL) have demonstrated incredible resiliency, suggesting a positive future.
The Consequences of Coronavirus So Far
Some notable challenges have arisen in commercial real estate in the first quarter of 2019, with rent and mortgage challenges faced by commercial and industrial businesses at the top of the list. As businesses shuttered facilities to comply with shelter-in-place orders, they stopped bringing in money. Whether small or large, any business without significant liquid capital has struggled or failed to make lease and mortgage payments. This will undoubtedly lead to some tense negotiations among tenants, landlords, and lenders in the coming months.
On-demand warehousing also surged in the face of COVID-19 as manufacturers and retailers hired 3PLs to rapidly open new facilities in support of massive demand increases or spiking storage needs. This trend has forced warehouse providers to get creative with non-traditional warehousing space, renovations of old buildings, pop-up warehouses and fulfillment centers, and much more. Short-term leasing also rose in popularity as many industrial tenants sought space for only a few months to hold excess inventory or raw materials.
Long-Term Predictions for U.S. Industrial Real Estate After COVID-19
Overall, most predictions show that supply chain restructuring will spur ongoing growth in industrial real estate in the form of increased demand for warehousing. While many manufacturers and retailers have leaned into Just-in-Time inventory practices for the past few decades, the pandemic revealed that the failure to hold excess inventory can be detrimental to certain businesses during an emergency.
E-commerce will also contribute to the demand for warehousing and fulfillment space as the sector will likely retain much of the market share it gained during the pandemic. Among more general e-commerce, grocery delivery will undoubtedly expand in capability and capacity in response to the various lessons learned throughout the coronavirus ordeal.
While some construction activities were deemed essential, many industrial construction projects could not meet the standards for essential operation and consequently fell behind schedule. While original estimates suggested that supply would finally outpace demand in 2020 by 20–30 million square feet, that now seems highly unlikely in the wake of the pandemic. Real estate firms and warehousing providers will need to continue developing and providing creative solutions to capacity shortages throughout 2020 and beyond.