3 minute read time
23 March 2020

The COVID-19 pandemic will end the longest period of economic growth on record. While the full impacts of COVID-19 are still rapidly evolving, there already are glimpses of how the virus may alter U.S. industrial real estate demand in both the short and long term.

Figure 1: Comparison of Current Cycle vs. Previous Cycle

Mar2020ILCoronavirusFig011000px

Source: CBRE Econometric Advisors, Q4 2019.

Many industrial occupiers are taking a wait-and-see approach, which likely means less leasing activity and higher vacancy rates for much of 2020. However, the likelihood of the industrial market posting negative absorption is minimal. Warehouse operations are more essential than ever, and this will keep most occupiers in place throughout the downturn. The main contributor to higher vacancy rates is the new development slated for delivery over the next six months.

As detailed in a recent CBRE MarketFlash, approximately 60% of new development delivered in 2019 was occupied by year’s end—a rate that likely will not be achieved in 2020. Therefore, tenants will have more negotiating power as the rate of growth in asking rents decelerates. There is the chance that the amount of new construction this year will be much lower than anticipated, especially if COVID-19 quarantines are extended and construction workers are unable to work. Development starts will also fall, as permit approvals are delayed because of fewer available municipal workers to approve them.

While the short-term outlook for industrial real estate is to the downside, the long-term effects of COVID-19 may boost demand in three ways:

  1. Inventory Controls: Retailers have been caught off guard by the consumer response to this virus. To ensure inventory levels are adequate to quickly meet demand, retailers will insist that vendors keep higher amounts in stock, thus increasing the demand for warehouse space.
  2. Supply Chain Diversifications: Supply chains that rely on China have been disrupted by two major events in the past 12 months—U.S.-imposed trade tariffs and the COVID-19 pandemic. Other factors like rising labor costs and intellectual capital concerns also may drive companies away from China and into other parts of Asia, Mexico and even the U.S., especially as automation improves. This diversification will drive demand in U.S. East Coast and inland port locations.
  3. E-Commerce: COVID-19 and its associated quarantines are creating new online consumers, which will further increase e-commerce’s share of total retail sales. As it has been for more than a decade, e-commerce will once again be the biggest catalyst for both demand and change in industrial real estate over the next cycle. Increasing demand for goods bought online, especially food, will fuel the need for distribution facilities at a pace much higher than in the current cycle.

Figure 2: U.S. E-commerce Penetration, % of Total Retail Sales Forecast

Mar2020ILCoronavirusFig021000px

Source: CBRE Research, Euromonitor International, 2019.

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