Weekly Update:

Industrial Capital Markets

October 5, 2020

As the 4th quarter of 2020 begins, we prognosticate a bit about the future of industrial real estate and the capital markets. We also have the unique opportunity to present insights from some C-Suite industrial professionals about their prospective on where we may be headed.

Erik Foster Principal Head of Industrial Capital Markets

Industrial Investment Outlook 2021 Series

The robust performance of the industrial sector during the pandemic, fueled largely by rapid ecommerce growth and other consumer buying activity, is seen as a harbinger of strength for 2021 and beyond. Fundamentals are expected to remain strong across most U.S. markets and there is considerable capital waiting to be placed, with many investors focusing on core markets, particularly those in land constrained areas. These sentiments were echoed by several industry experts interviewed as part of our Industrial Investment Outlook 2021 series, which will be highlighted periodically in this newsletter As the fourth quarter of 2020 approaches, ecommerce growth is continuing at a record pace and more and more consumers are adopting online shopping patterns that may continue long-term. This activity, when combined with growth in spending at consumer goods retailers such as Target, Walmart and Lowes, and medical supply companies, is creating significant demand for industrial space. “I anticipate we will continue to build upward momentum through late 2020 and into 2021,” said Jojo Yap, Chief Investment Officer with First Industrial Realty Trust. “We expect strong momentum in industrial leasing, construction, and investment, particularly with infill land positions and in land constrained markets. Among the key indicators we’re tracking are ecommerce as a percentage of overall sales and trade, with a focus on inbound cargo, as that’s what ends up in warehouses.” Jim Clewlow, Chief Investment Officer with CenterPoint Properties, also noted the strength of land constrained markets and a strong demand for larger industrial space. “We are seeing aggressive pricing and strong leasing demand, particularly for transactions that are 750,000-sf and larger.” A significant driver of overall market activity right now is changing consumer behavior due to the pandemic. More people are ordering online, buying products curbside and shopping in grocery stores instead of going out to stores and restaurants. “We’ve seen a significant shift in consumer food consumption during the pandemic and that is changing how food is distributed,” Clewlow said. “Grocers are as busy as they have ever been and, as more food goes through their system, this is translating into a greater demand for industrial space for their users.”

Market to Watch for 2021

While there was much talk about growing secondary markets heading into the pandemic, many investors now are focusing on core markets with access to large populations centers, such as Southern California, Dallas, Chicago, Atlanta, South Florida, New Jersey, and Eastern Pennsylvania. The constant theme with all of this activity is ecommerce. “Every ecommerce transaction requires a lot more industrial real estate and we don’t expect any kind of snapback in that activity,” said Matt Brodnik, Chief Investment officer with Exeter Property Group. “We still see a great deal of tenant demand in most of our markets and actually saw more leasing done in 2020 than in all of 2019. Amazon has been a big tenant for us and we are also seeing activity from Walmart, Lowes, Best Buy and other consumer products retailers.” Among the markets with some imbalance is Houston, which saw a high volume of speculative construction before the pandemic and then an uptick in vacancies. “Kansas City and St. Louis have also seen a slowdown but we’ve seen a lot of other markets doing well,” Brodnik said. “Memphis, Charlotte and Indianapolis are markets where activity has been strong, as well as core markets such as New York and New Jersey.”

Investment Outlook

The strength and stability of the industrial sector continues to attract investors, who have considerable cash on the sidelines ready to be placed. “There is a lot of stability in the industrial market in terms of cash flow in markets across the U.S.,” Yap said. “You don’t have a lot of roll over costs and industrial has the lowest Capex costs of all product types. We except that to continue. Long term, a number of investors are continuing to allocate capital in coastal markets with supply constraints. When you combine good demand with a supply-constrained environment, there is a greater potential for rent growth.”

Stay Well. Stay Tuned. Stay Informed.