It is not headline news that industrial real estate has been a strong investment over the past 7-10 years. Given the extreme demand for properties and dramatic rise in transaction prices in primary markets, some investors had, in recent years, begun to turn away from the asset class, citing an inability to realize appreciation at what were perceived to be inflated asset values. However, the impact of COVID-19 has caused an unprecedented uptick in demand for e-commerce services, warehousing, and logistics properties which will be needed to satisfy the requirements of online retailers to meet two-day and same delivery expectations.
While data support the view that industrial properties in primary markets had reached all-time highs, secondary and tertiary markets had also begun to see cap rate compression as a result of investors chasing yield in one of the most capital available environments in decades. But COVID-19 has caused disruption to exist conditions in the industrial market (both manufacturing and warehousing/logistics) that could lead to opportunity. U.S. e-commerce increased 49% in April 2020. A significant portion of this demand was due to increased adoption of grocery delivery and “buy online, in-store pick up” orders, two trends expected to see significant future growth. Further, disruption to the U.S. supply chain has led many businesses to consider onshoring elements of product manufacturing in an effort to protect against product shortfalls amid future potential outbreaks.
An investment thesis could be developed around solid investment fundamentals, spotting trends in market growth, and a disruption to the marketplace status quo. COVID-19, and the acceleration of e-commerce and logistics trends it has forced upon the market, has been the disruptor. Following trends of population and employment growth reveals some of the fastest-growing secondary and tertiary markets in the country, including the metro and surrounding population centers of Tampa, Fort Meyers, and Orlando, FL; Charlotte, NC; Charleston, SC; Salt Lake City, UT; Denver, CO. These factors, combined with locations where industrial demand continues to outpace supply, demonstrate the potential for sustained rent growth and multi-year asset appreciation as the market growth continues.