Before the pandemic, industrial real estate demand was largely balanced by supply and demand dynamics. However, between 2020 and 2021, demand surged as companies adjusted their supply chains and e-commerce businesses expanded to accommodate the spike in online shopping driven by Covid-19. According to Forbes in The Looming Post-Covid Industrial Real Estate Correction , this led to a historic drop in available industrial space and a corresponding rise in rental rates as tenants competed for limited space. In just two years, rental rates in key U.S. markets increased by 30% to 50%, reflecting the intense competition for the diminished supply (Forbes, 2024). To give us more insight into this intense competition for industrial space, we’re talking to two industry experts: Adam Nourafchan, Managing Partner and Founder, Lunada Rose Partners and Kelsey Nastasi, Manager, Industrial Research, JLL. Read the below Q&A for their thoughts on how to post-COVID shift is affecting the market.
How do you think the post-COVID shift in supply chains and consumer demand is impacting the industrial real estate market, and what trends should investors be most aware of?
Nourafchan: The COVID-19 pandemic led to significant shifts in tenant's real estate strategies as there was a surge in online shopping and e-commerce while there were major supply chain disruptions around the world. Responding to these changes, businesses were focused on onshoring their production and distribution in an effort to mitigate supply chain risk. This led to a boom in industrial demand that resulted in billions of square feet of new development which, coupled with inflation, brought on a period of unprecedented rent growth. However, investors should be aware that much of the COVID tailwinds for the industrial sector are waning: the pace of rent growth is slowing, vacancy is increasing, and the development pipeline is fading. Tenants have grown more cautious in this environment, and occupiers are showing a preference for renewals rather than risking disruption and costs associated with relocating under a new lease. In the event an occupier does sign a new lease, there's a strong preference for spaces that have modern specs and technology, which help the tenant's business ramp as quickly as possible.
Nastasi: The post-COVID shift in supply chains and consumer demand has profoundly impacted the industrial real estate market. The increased adoption to online shopping and e-commerce growth has driven a surge in demand for industrial space, as companies seek to build strategic inventory buffers and streamline their supply chains. This trend has also fueled the expansion of urban logistics, with a growing need for smaller distribution centers in urban and suburban areas to support rapid delivery services. The rise of online grocery shopping and food delivery has spurred demand for temperature-controlled and cold storage facilities. Simultaneously, supply chain restructuring has led to increased nearshoring and reshoring activities, with many companies relocating production closer to end markets or back to their home countries. This shift has boosted demand for manufacturing facilities in specific regions, further reshaping the industrial real estate landscape. The sustained growth of e-commerce continues to drive high demand for logistics spaces, underlining the sector's resilience. Simultaneously, the increasing adoption of warehouse automation is likely to reshape space requirements and design specifications. A rising focus on sustainability and energy efficiency is top of mind for property owners and occupiers. The evolution of urban logistics, marked by the emergence of micro-fulfillment centers and multi-story warehouses in densely populated areas, is redefining the concept of last-mile delivery infrastructure. Lastly, long-term reshoring trends and manufacturing growth are potentially shifting demand to new locations and facility types, opening up opportunities in previously overlooked markets. These intertwined trends are set to significantly influence the industrial landscape in the future.
With many companies reassessing their warehouse and distribution needs, what strategies can property owners adopt to minimize the risks of an industrial real estate correction?
Nourafchan: Existing property owners should mitigate leasing risk by working to make deals with existing tenants at the property, with a bias towards longer lease terms. Investors for new acquisitions should also respond to the recent market changes by focusing on multi-tenant properties to reduce the risk of having a rent roll concentrated to only one or two tenants. Investors can also focus on smaller assets in stronger infill locations - as much of the oversupply in this last development cycle was concentrated in outer submarkets where land was more plentiful. Targeting acquisitions with tenants currently leasing below-market rental rates can help the chances of renewing and keeping them at the property.
As the market responds to these changes, how can commercial real estate professionals’ best position themselves to support clients navigating this evolving landscape?
Nourafchan: Markets are local, and it's important to be apprised of all the latest headlines and data that affect tenant demand. Business models and technology are always changing, and it's important to keep up with the latest trends in distribution to make sure your building is not slowly becoming obsolete to the way the industry evolves.
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