CEO at Fyxt Inc.
When one thinks of industrial real estate, images of smokestacks and hulking machines are conjured up, along with dirt, grime and trash. Diving deeper, however, one finds that the industrial real estate market is actually quite a reasonable value proposition.
Industrial, after all, is an “essential” real estate class, has tenants who tend to be more stable than other asset classes and, in general, is less expensive to maintain as an asset. Having been in the real estate sector for 11 years and really delving into the finer details of the asset class, I am convinced that now is industrial real estate’s turn to shine well into the future.
I believe that the industrial sector has been an underserved asset class due to these lower expenses, triple net leases and general stigma that these “types of businesses” don’t require the white-glove treatment that is afforded to the office and retail sectors. That is all about to change.
The Amazon/Apple Effect
The internet changed the way we shop and consume products. Large online retail companies like Amazon began to capture market share of traditional retail circa 2000. It was not until the ubiquity of smartphones, thanks in large part to Apple, that the effects of online shopping began to take hold on the retail sector. Smartphones bridged the gap of the online and offline experiences, allowing consumers to leverage the power of information and pricing to achieve maximum savings.
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The seeds of destruction had been sown. Retail stores were now competing directly with warehouses and online shopping sites. Consumers are and will continue to get their goods shipped using logistics, and of course, at the very heart of it all, industrial real estate will be there to serve.
Covid-19: Adding Insult To Injury
As retail continued to suffer what is commonly referred to as the retail apocalypse, the introduction of Covid-19 only exasperated retailers’ plight. As a 2020 CNBC piece described, the pandemic forced retailers to invest in “contactless ways for customers to shop and expanded e-commerce options such as curbside pickup.” Furthermore, “the global crisis has widened the gap between off-mall retailers such as big-box stores and mall-based retailers.”
Industrial CRE’s Moment
Amid this, industrial is having its moment to outshine classic CRE focus and investment dollars. With Covid-19 forcing consumers to turn to online solutions, in conjunction with the decline of retail and other CRE food groups like office and hospitality, investors and retailers themselves are focusing on industrial investments and logistical infrastructure to bridge the gap.
Industrial real estate seems poised to be the underpinning of the commercial real estate sector as large brokerage firms and CRE think tanks forecast good tidings. Cushman and Wakefield’s North American Industrial Outlook report for 2021 agrees: “The tailwinds of e-commerce and heightened focus on supply chain resiliency will certainly keep the market in an upswing with record construction and new all-time high rental rates on the horizon. Potential pandemic headwinds and ongoing tensions with international trade suggest an interesting ride for the North American industrial market over the next two years.”
JLL’s Q4 2020 Industrial Outlook (download required) has a similar sentiment: “The logistics sector continues to benefit from the huge shift in online buying, with an increased demand from Construction Materials & Building Fixtures industries.
The Future Is Bright For Industrial CRE
As other CRE investment groups continue to struggle with declining retail sales as well as Covid-19 pressures in 2021, industrial real estate will remain an attractive proposition due to its resilience and continued market demand for last-mile delivery, cooled storage and warehouse/logistics needs.
With this major shift in CRE, here are some considerations that will be necessary to understand for those looking to gain an edge in this soon-to-be very competitive market.
1. The sector will be data-driven. Institutional money will continue to flow into the industrial sector and the acquisitions, operations and tenant selection will be heavily supported by data. Ownership will want to know more and have transparency into what is happening at their properties. Simply put, they want to follow the money. How you track this data and monitor operational expenses will be crucial for underwriting and the more data about your tenants you can track, the better.
2. Tenant satisfaction is the key. The price per square foot for the industrial sector is going up. And the types of companies leasing these spaces are not your mom and pop shops anymore. Logistics, manufacturing and fulfillment all play a major role in the transition from brick-and-mortar to digital retail, and there are larger companies running these operations. They expect ease of use, transparency and a direct relationship to their property management company.
3. Not all industrial buildings are created equal. When acquiring property in this asset class, it’s important to understand the functional possibilities of the building. Some industrial buildings are functionally obsolete. Look out for buildings that have too low a ceiling height, not enough yard or truck turning radius or inadequate sprinkler systems. Tenants will be looking for space that can solve their logistical needs, which will also include adequate power, functional buildout and building amenities such as yards or access to freeways and ports.
There May Still Be Bumps In The Road
Uncertainty with politics, social unrest, Covid-19 and major geopolitical events like the U.S.-China trade war could hamper the U.S. dollar, commercial real estate or the American economy in general. But all things being equal, I am betting on the success of industrial buildings as an asset class for many years to come.