Few business sectors have experienced growth and success over the last two years, but industrial real estate has stood apart since the onset of COVID-19 in early 2020. The pandemic spurred numerous trends which have continued to benefit industrial real estate owners, real estate investment trusts (REITs), developers, and other industry players. Though most other commercial real estate sub-sectors struggled, industrial has steadily led the pack throughout the pandemic.
How COVID-19 Continues to Impact Industrial Real Estate
With only about 60% of the U.S. population vaccinated and new variants cropping up, COVID-19 issues will impact industrial real estate trends and decisions for the foreseeable future. Some of the pandemic-related trends in the industrial sector include:
- A warehouse capacity shortage. The pandemic revealed the convenience of shopping online to consumers, which has drawn out an eCommerce boom that initially began due to government lockdown recommendations and fears of viral exposure. However, as online sellers and omnichannel retailers strive to keep pace with new consumer buying trends, they need more fulfillment space. In addition, large orders from overseas have jammed up major ports, contributing to higher demand for storage space near those facilities. While the supply chain has finally begun to show signs of recovery, these issues will still take a long time to resolve fully.
- Supply chain restructuring. Logistics and procurement experts have implemented numerous strategies to improve the resilience of corporate supply chains. Renewed interest in reshoring has created a demand for viable manufacturing space on American soil as U.S. companies seek to shorten supply chains. Businesses have begun regionalizing inventory and production capabilities across multiple areas to avoid the risk of total shutdowns when one facility gets affected by a viral outbreak or another disaster. Government incentives for goods that were “Made in America” have further inspired interest in doing business in the United States.
- Demand outpacing supply. The industrial real estate sector experienced record-low vacancy at 4.3% in Q3 2021, and demand still far outpaces the delivery of new inventory. Meanwhile, disruptions in the supply chain for construction materials and labor shortages across industries have continued to hamper new development. As a result, the ongoing need for warehouses, fulfillment centers, distribution centers, factories, and other industrial space will undoubtedly drive industrial real estate demand for years to come.
- Sustainable buildings. The pandemic caused increased interest in sustainability. Businesses with robust sustainability programs outperformed competitors throughout the pandemic. Disruptions caused by COVID-19 have also spurred an increased focus on the next significant disruption: climate change. As real estate and supply chain stakeholders begin to grapple with the reality of climate change and how it will impact the business world in the future, interest in sustainable buildings will no doubt keep increasing. Some areas, such as New York City, have also implemented stringent carbon emission laws for real estate developers and owners that may slow the pace of new development.
- High asking rents. As long as capacity remains low, rents for industrial properties will keep climbing. In addition, urban areas and port-adjacent markets will most likely experience even higher rent growth. Overall, national industrial rents increased 7.1% year-over-year in Q3 2021, and there’s no reason right now to think they won’t continue climbing in 2022.
- Inflation protection. REITs and other big investors often pursue high-demand commercial real estate assets to protect themselves against inflation. Since regular rent increases usually get built into lease terms, owning in-demand properties helps owners to mitigate inflation risks. As long as industrial capacity remains low and demand remains high, expect investors to pursue industrial properties as a means to protect their portfolios.
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.