Coronavirus Saps Enthusiasm for Spec Warehouse Development

Large developers halt speculative construction to maintain equilibrium amid stay-at-home orders and a drop in leasing activity.

Next to apartments, commercial real estate prognosticators say industrial properties are best suited to weather the economic downturn associated with COVID-19. Despite a lockdown in place for most of the spring, distribution buildings remained active participants in the delivery of essential goods to stores and nonessential goods to consumers.


Still, the pandemic threatens to end speculative construction as industrial developers become more cautious. Spec development has become a staple in the industrial sector amid several years of robust absorption, with developers adding some 625 million square feet of spec space to the market since late 2016, according to commercial real estate brokerage JLL. But executives with Prologis, Duke Realty Corp. and First Industrial Realty Trust have reported that they will not pursue spec projects for the foreseeable future.

Order fulfillment firm ShipMonk has signed a full-building lease in San Bernardino, Calif. The 332,231-square-foot warehouse is part of a two-building project that Transwestern developed in November 2019. Photo courtesy of Transwestern

“I think it is likely we will see a significant decrease in deliveries going forward, and therefore, a fairly balanced supply-demand equation in 2021,” said Steven Schnur, COO of Duke Realty Corp., during the company’s first quarter earnings call with analysts in late April.

Despite a recent rise in e-commerce sales since early March, overall retail consumption outside of groceries and pharmacies is expected to drop. The effect is already filtering to the industrial sector, said Matthew Dolly, director of research for real estate brokerage Transwestern.

“Leasing activity has decelerated considerably during the past several weeks and the second quarter is on pace to be the slowest quarter in 10 years,” he said. “But while demand will remain sluggish in the short term, industrial assets will prosper in the long run and outperform other sectors.”

Sector Insights rotates among office/medical office, industrial, retail, multifamily, self storage and hotel/hospitality.

Read the June 2020 issue of CPE.