• Mark Childs, SIOR

Industrial Shines

Each person reading this has a different story to tell. For industrial space users, were you an essential business? Do you supply restaurants? Just right there your perspectives could be 180 degrees opposed. Regardless, both are trying to figure out how to produce and move product within the constraints of the virus protocol. However, compared to owning a restaurant or some other form of retail operator, you’re probably doing better than the vast majority of folks in other SIC codes.

Through all this calamity, industrial has been chugging along. Second Quarter net absorption (space leased minus space vacated) was at 1.2M SF, where historically we’ve tended to average around 3M SF absorption each year. Admittedly First Quarter absorption was a negative 200K SF, but a first half average of 1M SF is still stellar during these challenging times. I’ll get into why industrial continues to do well a little further in, but first I’ll share what I know (which is actually very little) about the other real estate categories.

Retail has been hit hard. In 2015, for the first time ever in the US people spent more in restaurants than in grocery stores. I thought we’d never go back, but we have. For restaurants and hospitality, it has been a blood bath. Stores have mostly been hit hard, although grocery and home improvement have been quite strong. There are going to be some major price adjustments in retail real estate, impacting current investors (and tax bases). Looking forward, once we get through the price adjustments, the economics should bring things back to normal. Historically, retail land values have been priced considerably higher than industrial, yet recently I had a retail broker argue that his retail property wasn’t worth what my nearby industrial listing was worth. To oversimplify, a restaurant can potentially survive serving half as many customers if their rent is cut in half, which halves the value of the real estate.

Office is up in the air. How many companies can continue to work virtually? How many folks will need or want to come back to the social environment of the office setting? How will the virus impact the number of people that can ride in an elevator, or fit into a conference or breakroom? There are many forces pushing future space estimates up and down, so no one knows for sure at this point. One conversation that is certainly occurring is that folks are less interested in riding a bus into a downtown that is boarded up. I don’t focus on office, but if I did, I’d be moving my focus to suburban product. There are many "hub and spoke" conversations occurring concerning downsizing urban locations and opening suburban locations. The real future challenge to urban cores is going to be once folks realize they can work from everywhere, why live anywhere in an expensive city….

So, what makes industrial shine? Turns out the virus has simply accelerated global trends to the benefit of this product type.

  • As noted above, the "bricks to clicks" trend has been accelerated. People are getting more product directly from a warehouse, increasing the demand for industrial real estate in both the building and transportation categories.

  • We have come to realize we can’t have China making all of a product or ingredient. Sourcing must be redistributed around the globe and re-shored. Companies are starting to produce more products in the US.

  • Companies are realizing that no matter where they get the product, there can be interruptions in the supply chain, so keeping some buffer in the supply chain system is prudent.

  • If you want to compete with Amazon, you need to get the product to the customer faster. That means more small warehouses spread throughout the country. Bad for the Inland Empire (LA) or Atlanta, good for us folks tucked up here in the Northwest.

  • Demand has shifted. Companies are starting up face mask and sanitizer production facilities. Waste streams have been impacted. Change is good in real estate, including industrial.

As a result of the above demands, we are expecting lease rates to remain steady with maybe a little more in concessions. There will be some sublease opportunities, however they come with the risk of the sublessor going bankrupt, leaving you dealing with the Landlord at a location you’ve already moved into. Finding a quality industrial building will continue to be difficult, in part because industrial users continue to be strong, and in part because any investor looking for real estate is probably looking for industrial. You can learn more about the general Portland area industrial market in the following article in this blog.

At some point folks not paying rent is going to cause Landlords to miss debt payments, which is going to put pressure on banks, and could take us into a more serious situation. If we don’t get back to work eventually, everything is going to collapse. Sadly, I believe there is some politics behind this health issue. Hopefully, worst case, we will be through this virus by the middle of November. Assuming that is as bad as it gets, I believe the points made above will continue to drive Portland area industrial real estate forward and we should finish 2020 with more than 2M SF of net absorption. I’ll save the Presidential election for the next quarter.

Contact

SIOR

Affiliates