Snap Sessions: Industrial Challenges and Solutions for COVID-19
- May 29, 2020
The coronavirus pandemic is causing continued economic disruption in the U.S., and those challenges are likely to continue for some time. For commercial real estate, the industrial sector has been a bright spot, due in large part to to increased e-commerce and heightened demand for shipping products like pharmaceuticals and home goods.
However, with consumer spending down and unsettled trends in the retail sector, experts say trends within the industrial and warehouse sector could shift.
“It’s really going to be telling to see how many individuals press toward the demand to having goods faster, since we’re used to getting goods within 24 hours. Adding that to the mix could adjust the picture in the next 12 months.” said SIOR and CBRE Vice President Amy Broadhurst, commenting on the correlation between e-commerce and industrial market performance. She offered the observations during a recent CPE Snap Session webinar, “Industrial Challenges and Solutions for COVID-19.”
While shakeups are possible due to retail mergers and bankruptcies, Broadhurst said she expects the industrial and warehouse sector will continue to be the safest bet for investors going forward.
There is already an uptick in demand for refrigerated space at last-mile facilities, due to a big increase in online food shopping. But bankruptcies among retailers and smaller manufacturers that supply major corporations—like parts for the auto, oil and gas industries—could drive up vacancy.
“A number of these smaller companies are very key to these industries and if they tend to go out, could have an impact on space becoming available. And manufacturing companies would have to do something different with their supply chain,” said Patrick Sentner, SIOR president-elect and a CBRE executive vice president.
Industrial Design Issues
How industrial properties are designed and modified in a post-coronavirus world is a question many in the industry are facing. Broadhurst said it’s an issue that’s an “ongoing concern.”
“Automation has been one of the biggest components we’ve seen companies talking about investing in,” said Broadhurst. Fully automated facilities are considered a strategy to ensure safe, reliable manufacturing and production, she noted.
Sentner’s clients have been using their time in quarantine to take a hard look at their space requirements, and some have asked landlords for a reduction in square footage in exchange for a lease extension. That has proven to be an effective solution in cases when owners would rather have a long-term commitment from a credit tenant than lease a slightly larger footprint for an extra year or so.
“We’ve been able to create a win-win where the landlord has reduced the square footage, maybe invested a little bit into new light fixtures, docks, doors etc., and then the tenant in turn signed a longer-term lease,” Sentner said.
In the wake of recent credit-rating reductions on some of the biggest names in retail, the prospect of stronger cap rates does not look promising, said Sentner, adding that “some unwinding” is ahead in the next couple of months.
“With financing, the biggest negative is the unknowns,” said Broadhurst. “How do you understand the value of a property going forward when there’s so much fluctuation in the market right now?”