Demand for industrial real estate is surging as the coronavirus pandemic causes businesses to rely on e-commerce and domestically manufactured products to accelerate supply-chain efficiencies.
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E-commerce shifted into high gear in April when nonessential stores shut down in order to mitigate the spread of the novel coronavirus, prompting a greater need for warehouses to store products and plants to make goods. More retailers are pivoting to e-commerce and revisiting supply chains in order to fight for survival while brick-and-mortar retail remains stagnant. And now, retailers are even more reliant on fulfillment centers and warehouse facilities for their e-commerce operations.
In times of uncertainty, tenants are likely to stay put, reflecting the strong renewal objectives real estate assets have been meeting or beating. According to the National Retail Federation, citing data from the Wells Fargo Economics Group, non-store sales increased 28%, while e-commerce grew 19% of total retail sales, up 12% over the past two years.
Brennan Investment Group, a private real estate investment firm that acquires and operates industrial properties with a national portfolio, has seen a new class of tenants, from e-commerce to automated manufacturing to cold storage, that has been active in the market. New levels of tenant leasing activity coming from the rising sector have helped keep Brennan’s buildings full. Since the outbreak of the pandemic, occupancy levels have remained robust at 97.5%, and there has been a high propensity for renewal, with retention rates at 90%. Rent collections have ranged between 97% and 99%, a testimony to the fact that these buildings, whether warehouses or factories, are critical facilities.
“It was unbelievable to our eyes when we saw the proliferation and scale of e-commerce in action,” Michael Brennan, chairman and managing principal of Brennan Investment Group LLC, told FOX Business. “Our whole nation was provisioned during the coronavirus crisis largely by e-commerce. This is the most brutal proving ground for e-commerce that we will ever see in our lifetimes. And e-commerce held up. It proved itself.”
Industrial real estate owners like Brennan have been the direct beneficiaries of tenants who are looking for channels to meet the demand of lean manufacturing and inventory holdings.
E-commerce is also technologically propelling industrial to heights it's never reached before. Technology hinders commercial assets for most real estate like retail and office spaces and, on the contrary, technology has aided and assisted industrial absorption, according to Brennan.
“Industrial’s beneficial relationship with e-commerce is born of two factors,” Brennan said. “The disintermediation of retail into industrial opportunity and industrial buildings. It also owes gratitude to the technology and the logistical technology that makes possible the delivery of small parcels. The business went to palletized shipping i.e., big lots into stores to individual parcel delivery and individual people.”
The rise in e-commerce has also scaled the cold storage industry, with more people turning to online delivery services for grocery items.
Another sector where industrial real estate has been abetted by technology is manufacturing. Technology has allowed automation and robotics to grow exponentially, which has collaterally reduced the comparative advantage of low-cost locations in Asia that use cheap labor to produce goods. Robotics and automation have allowed manufacturing to be reeled back to domestic fronts, saving labor costs and logistical shipping.
“Coronavirus has shown us that if you are manufacturing in a far and distant location, a rapid response is more difficult to get things, to make them yourselves, to get them here quickly,” Brennan said. “We ran out of a lot of medical supplies, we ran out of a lot of things that the nation needed and we had a high dependency on foreign-made goods.”