The shift to e-commerce has accelerated the demand for multi-let industrial properties pushing vacancy rates to under 3%
The 2020 ecommerce boom was a greatly disruptive force, especially for many brick-and-mortar retailers. With the move from in-store to online purchasing, the COVID-19 pandemic has accelerated the shift to digital shopping by about five years, according to data from IBM’s U.SA. Retail Index. In the USA if brick-and-mortar retailers have yet to make the digital push, they need to start; U.S. shoppers spent $791.7 billion on ecommerce in 2020, up 32.4 percent from 2019, according to data from the U.S. Census Bureau.
But if the pandemic was a headwind for the retail sector, it provided a tailwind for the industrial sector, as shopping moved online and into warehouses.
Retailers will need to increase their distribution-center footprints across the country because of the projected significant growth in e-fulfillment volumes, and with that, the need for industrial real estate will grow. Ecommerce was the primary driver of leasing in the industrial market, which increased 26.9 percent in 2020 from 2019, according to JLL.
And U.S. ecommerce-related net absorption for the industrial sector rose from 65 million square feet in 2019 to roughly 100 million square feet in 2020, which translates to incremental demand of 25 million square feet to 50 million square feet, according to a report from Prologis. the world's leading industrial property REIT.
“We are about one-quarter through the incremental demand from ecommerce alone. We also expect structural tailwinds from supply-chain reconfiguration for resilience, a move away from just-in-time inventory management. This should lead to higher inventories — a plus for the sector,” says Martina Malone, managing director, global head of capital raising, at Prologis.
With ecommerce as one of many variables in the growing demand for space, industrial absorption and capital values have been the one sector of the market that has seen stability, says Rael Levitt, who is the CEO of Inospace, South Africa's largest owner and operator of multi-let industrial parks.
" It will take several years for industrial and logistics supply chains to catch up with the changes in shopping patterns brought about by the pandemic. The ecommerce boom is only halfway through, meaning that more logistics infrastructure will still need to be developed over the next several years". For this reason, Levitt believes that industrial warehouse will likely continue to outperform other main property sectors over the next several years.
"It is unclear if the rapid adoption of ecommerce will prove sustainable, but the metrics indicate the current strength of the industrial sector".
According to Inospace of the fourth quarter 2020, the average vacancy rate for its industrial property portfolio was at 2.6 percent, suggesting that supply-and-demand fundamentals still significantly favor industrial property.
“The industrial property sector finished 2020 on a remarkably robust note. We have seen that this momentum has continued into 2021, as more and more businesses scramble to beef up their ecommerce operations. Given such strong demand, we forecast that effective rents will grow from 8 percent to 10 percent in 2021. In turn, the industrial sector will likely once more outperform the NCREIF Property Index this year.”
The relative value of logistics real estate has become increasingly clear through the COVID-19 crisis, says Levitt. “Strong fundamentals tied to the resilience of the customer base, long-term structural tailwinds and rising barriers to new supply position it well with respect to other asset classes, particularly for facilities in favorable locations near large consumer populations,” he notes.
Industrial warehouses link product manufacturers to storage for products of all types and distribution across a wide geographic area, or to local facilities that serve customers down to the last mile.
Although competition for industrial deals is increasing, opportunities to acquire and develop industrial warehouses are still available. Industrial tenants are looking for population density and available labour force. Investment in these sites is important because rent growth, scarcity and high barriers to construction increase the value over time.
“Location matters. I am seeing tenants put a premium on location and product, rather than lease rate, for the first time in this asset class,” says Inospace Investment Director, Daniel Yach. “To allow for that dynamic to work for our tenants, we spend a lot of time and effort sourcing unique sites and designing best-in-class buildings with one goal in mind — to allow our tenants to be more efficient and more productive in our industrial parks. The additional work that we put in to increase the quality of our buildings is generating higher returns.”
The industrial sector comprises numerous product types: large, modern distribution centres of more than 50,000 square metres; traditional industrial warehouses of about 5,000 - 10,000 square metres; mid-sized warehousing of between 1,000 square metres and 2,000 square metres; mini-warehouses of less than 1,000 square metres and micro-units which are under 500square metres.
To find the right investment, it takes on-the-ground knowledge: Which submarket within each market can provide the most opportunity?
“There’s a lot of pent-up demand at the consumer level. In today’s pandemic environment, a higher percentage of consumption is being handled through ecommerce and moving directly to the consumer through a distribution center, rather than through a storefront,” says Yach. “As consumption increases overall, and with a higher percentage of that consumption moving through our warehouses, we can see a scenario where there’s not enough secure industrial square metres on the ground, and that development will probably need to ramp up to continue to keep pace with increased absorption and increased tenant demand.”
“The long-term outlook for multi-use industrial properties is strong, with clear industry momentum from ‘basic needs’ tenants and growing investor demand for this subclass,” explains Yach.
Inospace defines multi-use industrial parks as 10,000 to 50,000 square-metre multitenant industrial buildings in dense, infill locations around South Africa. These buildings often contain distribution, flex showroom, industrial showroom, R&D, warehouse and/or manufacturing space and have a diversified, local tenant base.
Given they are often older properties, they witnessed population centres growing around them, making multi-use industrial properties not only almost impossible to replace but highly sought-after as last-mile logistics locations close to end users. Compounded by industry fundamentals driven by macroeconomic factors such acceleration of ecommerce adoption, the increased demand for these smaller, multitenant industrial assets has significantly dropped vacancy rates nationwide.
It remains to be seen what the post-COVID-19 world will look like, but most of the accelerated growth will persist, as new digital adopters become familiar with ecommerce and its convenience, which will continue industrial real estate’s acceleration.