Most investors are familiar with commercial real estate assets like multifamily, retail, office, and senior living, but many investors are not as familiar with industrial real estate. As one of the few asset classes that has experienced increased demand following the COVID-19 outbreak, investing in industrial real estate provides investors with highly favorable risk-to-reward opportunities amidst an increasingly turbulent real estate landscape.
Although industrial real estate may not garner the attention that its flashier commercial real estate counterparts do, industrial real estate serves a very important role in the global economy and in the global movement of goods. The role of industrial real estate in global, national, regional, and local supply chains cannot be overstated.
Industrial real estate has a diverse set of sub-asset types that includes the following:
· Bulk Distribution — used for distributing goods to businesses or consumers.
· Manufacturing — used for producing products using special machinery, chemicals and/or materials.
· Storage (including Cold Storage) — used for storing goods including temperature-sensitive items such as food and medicine.
· Data Centers — house large numbers of computer servers and/or telecommunications equipment.
· Flexible Buildings- also known as “flex” and allow for a wide range of office and warehouse configurations.
The COVID-19 pandemic has accelerated pre-COVID19 trends affecting industrial real estate such as increased e-commerce sales (online purchasing by consumers), build-up of higher inventory levels by retailers and manufacturers, and reshoring of manufacturing.
These trends not only signal continued growth in demand for industrial real estate, but also highlight the increasingly bullish, long-term fundamentals for the asset class. It is anticipated that there will be a lack of available inventory in many major markets and that construction of new industrial assets will not be able to meet the anticipated demand.
Over the last decade, global e-commerce sales have experienced double digit growth on a year-over-year basis. While 2020 was projected to be another strong year for the industry, the COVID-19 induced lockdown orders coupled with social distancing protocols spurred an astronomical growth of online shopping in the United States and across the globe. This shift towards online shopping will serve as the biggest catalyst for the continued growth of industrial real estate in the United States.
In addition to the ascent of e-commerce, heightened consumer demand for faster delivery times have led to the development of “last-mile” sites in urban areas, which enable firms to be closer to end consumers and accommodate same-day and one-day shipping. Warehouse and distribution centers located near large population centers will become highly sought assets as firms and logistics companies alike look to secure every possible competitive advantage in the fast-moving, highly competitive world of e-commerce.
According to Prologis Research, e-commerce sales penetration in the United States for 2020 was forecasted to be 16.9% prior to the COVID pandemic but it is now forecasted to be approximately 20% post-COVID.
Over the last decade, global e-commerce sales have experienced double digit growth on a year-over-year basis. While 2020 was projected to be another strong year for the industry, the COVID-19 induced lockdown orders coupled with social distancing protocols spurred an astronomical growth of online shopping in the United States and across the globe. This shift towards online shopping will serve as the biggest catalyst for the continued growth of industrial real estate in the United States.
In addition to the ascent of e-commerce, heightened consumer demand for faster delivery times have led to the development of “last-mile” sites in urban areas, which enable firms to be closer to end consumers and accommodate same-day and one-day shipping. Warehouse and distribution centers located near large population centers will become highly sought assets as firms and logistics companies alike look to secure every possible competitive advantage in the fast-moving, highly competitive world of e-commerce.
According to Prologis Research, e-commerce sales penetration in the United States for 2020 was forecasted to be 16.9% prior to the COVID pandemic but it is now forecasted to be approximately 20% post-COVID.
The need for more resilient supply chains has prompted some businesses to diversify their supply chains, which has led to reshoring of manufacturing or near-shoring to Mexico. As expected, most of the reshoring of manufacturing is expected to occur in Southern and Southwestern right-to-work states. Alternatively, businesses may, as a minimum, adopt “China Plus One” strategies to expand manufacturing outside of China in order to reduce their supply chain vulnerability.
Although no commercial real estate asset class has been immune to the effects of COVID-19, most industrial tenants have been able to operate with little, if any, negative effects, and most industrial landlords are maintaining strong rent rolls. In addition, it is projected that more than 1 billion sq. ft. of additional industrial real estate will be needed by the year 2025 to meet future demand.
The logistics sector is constantly evolving as the use of technology such as mobile robots, automated storage, retrieval systems (ASRS), and real-time tracking is becoming an integral part of most industrial operations. These technological advances and other operational efficiencies will continue to support the growth of industrial real estate due to reduced operational costs.
Industrial real estate with credit tenants, especially in markets with significant barriers to entry, will present investors with attractive investment opportunities with asymmetric risk-return profiles.