Pandemic’s effect on industrial real estate
By: J. David Chapman/May 7, 2020
Real estate is being affected by the coronavirus pandemic. We are about to see the degree as the economy opens back up. We consider two scenarios. The first is a V-shaped recovery where the economy comes back very quickly. The second is a U-shaped recovery that assumes the country will take a little longer to solve the health issues and therefore employees and customers do not return to the marketplace as quickly. Even under the best-case scenario of a V-shaped recovery, there will be significant disruption to all aspects of real estate. Specifically, I want to consider changes in industrial space.
Industrial properties have been a top-performing real estate sector; however, although early, we are starting to see a disruption caused by COVID-19. Warehouses in the U.S. earned 13.4% in 2019, the only sector to produce double-digit returns in the NCREIF Property Index. The success has led to lot of new warehouse construction and dramatically increased rents. The increased supply and rising expense come just as cargo shipped from China reduced significantly due to the pandemic and trade war. The coronavirus caused manufacturing to slow, retail operators to close, and radical supply chain disruption. Together, it is causing a negative effect on demand for warehouses.
However, as most things related to COVID-19, the analysis is not that simple. It appears that the same supply chain disruption could also cause a new surge in warehousing demand. Some property managers are being asked to secure additional storage space as lockdowns change consumer buying behavior. The theory is that longer-term changes in how companies manage their supply chains, including a more robust e-commerce operation and carrying more safety-stock positioned around the country, causes businesses to soften their lean-inventory strategies. A move away from just-in-time inventory causes existing tenants to fill warehouses to position goods for distribution. This positioning of goods supporting “last-mile” could actually help industrial-demand in cities like Oklahoma City and Tulsa.
The market to store and position goods for distribution remains volatile, with business shutdowns curbing activity among some operators while others scramble for additional warehouse capacity. COVID-19 will likely cause a pause in demand and affect the velocity of expansion and new leasing, but I expect that increased demand will regain momentum as fears over the coronavirus pass.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).