As the COVID-19 crisis continues to unfold,
where are the green shoots?
Which property type is likely to benefit,
from the tailwinds of economic and structural change,
even as the headwinds of COVID-19 hopefully die down
in the near future?
We believe that the Industrial property market
is uniquely poised to benefit from these massive changes.
But first a clarification.
From the point of view of Commercial Real Estate investing,
when we refer to Industrial property markets,
we're not talking about, abandoned manufacturing facilities,
in Detroit and Cleveland.
We're talking about warehouse and distribution facilities,
that mushroomed and evolved because of trends like
just in time logisitcs.
We're talking about data centers that now support
nacet industries like streaming services, or social media.
These are the buildings that are uniquely poised
to benefit from the increased shift
of interaction and commerce online.
When you take a look at total retail sales,
that was driven to an historic drop in April,
because of widespread economic shutdown.
We actually saw that non-store retail sales,
which captures e-commerce actually kept rising.
So, it looks like we are not going back to those end 2019 levels
that we recorded of 11.4% share for e-commerce
relative to total retail sales.
I believe that moving forward,
we will continue to do more business online.
But lets quantify just how much of a structural boost
industrial properties are likely to get
from this increased shift to e-commerce.
Research from industrial giant Prologis,
indicates that an online retailer needs about 3 times
the warehouse and distribution space,
that the brick and mortar retailer needs,
to generate the same level of revenue.
So why might this be?
First - an online retailer typically needs to stock up
on more goods, because of the broader aray of product lines
they tend to offer via online platforms.
Second - an online retailer needs extra warehouse/distribution
space to account for returns.
Third - just think about the logistics -
if you're a brick and mortar retailer,
you use your warehouse/ distribution space
to ship well organized pallets of goods
to your retail store front.
But if you're an online retailer, you use and need
more warehouse/distribution space
to sort through goods, and to package it,
and to ship it directly to the end consumer.
For all of these reasons, we believe that over the long run,
industrial properties are likely to benefit from this crisis,
bought about by COVID-19.
2020 will likely bring about a slowdown in leasing,
and perhaps a negative rent growth for some places -
but industrial properties are likely to fare better,
even in that regard -
certainly relative to sectors like hotel and retail.