A new report from Moody’s Analytics Real Estate Solutions (REIS) said the consumer’s burgeoning propensity for e-commerce versus brick and mortar during COVID-19 will likely support growth for industrial commercial real estate such as warehouses and distribution centers, though the sector will not escape the current downturn unscathed.
“The industrial sector is likely to be a net beneficiary from trends that the COVID-19 crisis has either produced or accelerated,” said Victor Calanog, chief economist at Moody’s Analytics REIS and co-author of the report. “The increased shift to online shopping, greater space needs from online versus physical retailers, and structural flexibility will allow some industrial space to evolve and support performance metrics like rents and vacancies. However, over the long run, trends like reshoring and deurbanization could prove to be double-edged sword for warehouses.”
Moody’s Analytics REIS said its estimates show that in March and April, the proportion of e-commerce relative to overall retail sales spiked 500 basis points, to 16.4 percent, from 11.4 percent at the end of 2019. A shift from physical retail might result in some industrial space going vacant in the interim, but it magnifies demand for industrial space–specifically warehouses and distribution centers–by a net factor of two. The report explained that online retailers need three times the space to generate comparable revenue, but that is offset by one unit going vacant from physical retailers folding up shop.
Warehouse and distribution center vacancies are at 10.1 percent, up from 9.4 percent a year ago. Moody’s Analytics REIS is expecting retail vacancies to rise to historic highs, reaching 13.3 percent in 2021, with industrial properties poised to benefit from this structural shift over the long run.
Moody’s Analytics REIS expects industrial property values to fall 10.2 percent in 2020, half the expected decline for retail and much less than the 16.8 percent drop forecasted for office properties. The only property type expected to have values hold up slightly better than industrial is multifamily dwellings, with a projected 7.8 percent decline for 2020.
Another factor that could affect the sector is if more manufacturing operations relocate back to the United States. If this occurs as a backlash to what was seen as unpreparedness of the supply chain and the need to boost the domestic sector, industrial properties stand to benefit.
“But the effect is ambiguous for other subtypes like warehouse and distribution properties in port areas like Los Angeles and the Inland Empire area,” Moody’s said. “Will ‘reshoring’ lead to a decline in demand for industrial space as imports decrease or will any such decline be offset by an increase in domestic shipments and interstate commerce as manufacturing activity perks up between U.S. cities?”
In addition, if the coronavirus crisis results in a permanent reassessment of urban areas as being less desirable places to live and work, it could impact the sector through increased demand for urban infill locations for warehouse space as online retailers depend on “the last mile” for two-day or same-day delivery service promises.
“Still, despite these long-term uncertainties, it appears that the COVID-19 crisis has produced or accelerated structural trends in the economy that are poised to benefit the industrial sector, both in the short run and over the long term,” the report added.