Having Proven Resilient in a Pandemic, Industrial Assets Appeal to a Larger Group of Investors
Industrial real estate is weathering the COVID-19-related economic downturn better than many other sectors, due to acceleration in e-commerce during the quarantine, combined with increased demand for storage near ports as a wave of products arrived from China just as U.S. consumer demand declined.
“We’re seeing a surge of interest in industrial demand from investment groups that weren’t in the sector before,” says Chicago-based Peter Kroner, manager, U.S. capital markets, with real estate services firm JLL. He notes that prior to the pandemic retailers were systemically shifting toward a reduction in inventory and reinventing the retail experience. “The COVID environment catalyzed all this and caused traditional retailers that weren’t previously doing direct-to-consumer online sales to rethink the approach to their supply-chain strategy.”
As a result, investors traditionally focused on other real estate categories are now interested in industrial assets, and those already invested in the industrial sector are adding more properties to their portfolios, Kroner says. Family offices is one investor group in this new buyer pool seeking industrial opportunities, he notes.
While the hottest assets are “middle fairway”—distribution centers with 10- to 20-year leases and good-credit tenants, investors are also increasingly asking about value-add and development opportunities, according to Kroner. “We’re seeing a big pick-up in demand for last-mile assets.”
This typically involves small, older warehouse assets, but last generation office and retail centers are also being redeveloped into industrial space, particularly in land-constricted urban markets. “We’re seeing failed malls abandoned or 80 percent vacant purchased by developers for redevelopment as distribution space, because they check all the boxes for e-commerce fulfillment,” Kroner says. The malls are often positioned near large consumer populations and have lots of parking and good freeway access.
While city fathers would normally be reluctant to rezone retail to industrial, as sales tax is a source of revenue for cities, Kroner suggests that they are generally willing to work with developers when vacancy is well over 50 percent. “The jobs have already been lost, and the tax dollars are no longer present.”
Al Pontius, San Francisco-based senior vice president and national director for office and industrial assets at real estate brokerage firm Marcus & Millichap, also reports seeing interest in industrial assets pick up, with investors in other product types now wanting to expand into industrial. The strongest interest continues to be for large assets with long-term leases and one or two credit-worthy tenants, as those properties are the easiest for lenders to underwrite.