Despite the challenges and downturns of 2020, the industrial real estate sector continued to reign as the preferred asset class among investors in 2020. It remained resilient amid the ongoing covid-19 pandemic and continued its strong performance.
Despite a decline in overall transaction volume from an all-time high in 2019, industrial real estate saw rental rates increase, absorption remained positive and cap rates remained flat. In some cases, cap rates compressed in select markets.
Developers, owners and operators of industrial real estate continued to see demand for a wide range of space, from occupiers needing 1 million-plus square feet for regional distribution centers to those requiring less than 100,000 square feet for more urban, in-fill, last-mile space.
Investors that were beginning to question the rise in overall construction activity and new supply saw the completed space quickly absorbed by demand of third-party logistics suppliers, e-commerce firms and retailers.
After an initial slowdown in late Q1 and early Q2 with the onset of the global pandemic, institutional capital continued to pile into the asset class across the risk/return spectrum, from speculative development to the acquisition of core portfolios leased to Fortune 100 tenants on long-term leases. Investors globally remain under-allocated to the real estate asset class and industrial continues to benefit from this weight of capital.
A change of tune
While the sector has benefited from several tailwinds specific to it (ie, growth in e-commerce), its performance can also be attributed to the global shift in institutional portfolios from retail and office to industrial over the past few years as investor interest changes.
Legacy open-ended funds and domestic and foreign buyers continued to shift core investment allocations away from retail and office towards industrial, preserving and increasing valuations.
“Investors globally remain under-allocated to the real estate asset class and industrial continues to benefit from this weight of capital”
Industrial should continue to benefit from the acceleration of e-commerce as a result of changed consumer preferences as the global pandemic nears its one-year anniversary in March 2021. According to CBRE, e-commerce as a percentage of sales penetration jumped from 16 percent in 2019 to 24 percent in 2020.
Reshoring is a tailwind
While estimates predict a slight downturn in e-commerce growth as restrictions ease in the latter half of the year as the vaccines are rolled out, demand should remain robust – these changes in preferences are not reversing. Industrial should also benefit from the near-term “re-shoring” of production and the ongoing talk of needing a “safety” stock to avoid further shocks to the supply chain in the future.
In 2021, it will be interesting to see where and what types of industrial product institutional investors look for. We should expect more of the same – core investors re-allocating capital away from traditional sectors of retail and office that have been impacted by the pandemic. Hopefully for all of us, the music never stops.