The movement of goods ordered online and delivered to their final destination will continue to be a key driver of the industrial real estate market, according to commercial real estate services giant Colliers International.
The economic turbulence created by the COVID-19 pandemic continues to impact the economy. Although current signs are hopeful, it is impossible to tell whether the economic recovery will strengthen or stumble in the coming months.
Amanda Ortiz, director, national industrial research for Colliers, seems hopeful. “At the end of the second quarter, though, companies seemed less paralyzed to make real estate decisions than they were in March and April – an encouraging notion for the industrial sector.”
Colliers believes that the driving force will continue to come from consumers purchasing essentials online in record numbers, which in turn creates both short-and long-term demand for industrial space.
Ortiz notes that online grocery shopping in particular has experienced rapid growth, fueled by public fears of the coronavirus crisis.
Coresight Research agrees, forecasting that U.S. online grocery sales will grow 40% in 2020, following 22% growth in 2019. Ecommerce accounted for roughly 2.6% of U.S. food and beverage retail sales in 2019, but the projected growth in online grocery activity would raise that
sales percentage to 3.5%, or nearly $38 billion in 2020 and is projected to reach nearly $60 billion by 2023. This rise in activity will also prompt increased demand for industrial cold storage space.
for online goods and grocery
products bodes well for
continued development,” Ortiz
says. “With near-record levels
of product under construction,
supply is expected to outpace
demand in the remaining
quarters of 2020.”
While this would add upward pressure to overall vacancy, she believes the need for modern distribution space will keep the development pipeline full.
At current levels, the U.S. industrial market
in 2020 is on pace to set a new annual record for supply delivered, Colliers says, surpassing the 294 million square feet record previously set in 2018.
“Supply chains continue to be retooled as companies move forward with strategic decisions to keep more inventory on-hand, both of which stand to benefit the industrial sector,” Ortiz explains.
The Coronavirus pandemic also is fueling increased investment in automation of distribution centers and manufacturing operations, Colliers points out.
“The adoption of automation greatly reduces human interaction, while increasing employee safety in hazardous scenarios at the workplace. Automation leads to increased productivity and efficiency in many operations.”
Colliers even predicts that although this trend will reduce the short-term need for some warehouse and manufacturing workers, it will ultimately boost the employment of more skilled workers.
“While increased automation will affect industrial employment, the future will rely on highly skilled labor to operate complex systems and machinery, alongside of robotics,” Ortiz states.
The second quarter warehouse numbers look good, and although vacancy rates have crept upward slightly, they are still very low in historical terms.
Low vacancy in both core and secondary markets coupled with the delivery of new, higher-quality Class A space drove average asking rents to a record $6.29 per square foot per year for the second quarter. Quarter-over-quarter asking rents rose also 1.6%, which is seen as further evidence of a strong industrial market.
Amazon nabbed the top spot of bulk occupiers in the U.S., occupying a whopping 26.9 million square feet, Colliers observes. In the second quarter alone, Amazon occupied 20.9 million square feet year-to-date – which represents the highest quarterly growth by the company thus far.
In fact, at mid-year 2020, Amazon has already
transacted more space than they did in 2018 or 2019. Home Depot and Lowe’s Home Improvement remained in the top 10, occupying 5 million square feet, and 3.1 million square feet, respectively.
Colliers says this magnifies the trend of people embracing home improvement projects during the pandemic when many states imposed stay-at-home orders during the second quarter.
The Midwest continues to attract bulk occupiers to take advantage of its strong labor, transportation and logistics benefits, with ecommerce users taking 8.8 million square feet in Midwestern states.
Population, labor growth and relatively low business costs continue to fuel activity in the Southeast region, while the West region remains in third place, thanks to continued strong demand in the Inland Empire due to surging ecommerce demand and 3PL activity.