On today’s show we’re talking about what’s happening in the industrial and logistics market.
Last week, commercial brokerage house CBRE held a detailed webinar on what’s happening in the logistics market. There were over 1,200 attendees on the call. We’re going to summarize the perspectives on the industrial market.
How has federal stimulus impacted the economy? The stimulus has gone a long way toward smoothing over the impact of the pandemic. We are going to have a very negative year in 2020, down 6%. 2021 is expected to be a rebound of nearly 6% in GDP. We’re looking at two lost years of economic growth.
Much like the residential home market which has seen large drops in volume during the pandemic, Industrial transaction volume has been down by 2/3. The main reason for that is price discovery. Buyers and sellers haven’t figured out where pricing should be in the current market. The capital market for the sale of industrial assets has been fairly steady throughout the pandemic. When buyers and sellers come together, the cash is there to get deals done.
The top tier for investments are industrial and multi-family. The small number of rental defaults has shown a lot of stability in the multi-family market.
The top assets in industrial are for big box, cold storage. Lease rates are holding strong and increasing in some markets.
Sublease space is largely occupied space. Some companies are trying to temporarily downsize space requirements on an opportunistic basis. They’re not looking to sell space, but are hoping to cover costs within existing facilities by subdividing space.
Construction dropped by about 30 million square feet in the current quarter. But at the end of Q1, there were more than 300 million SF of space under construction. That’s an all time high. Pre-leasing is in the 30% range for that space. Record low vacancy of 4.5% across the industrial market. Compared with 2008, the market had 7.5% vacancy and very quickly moved into an oversupplied scenario. Ground-breakings have dropped in the most recent quarter and is expected to create a drop for new supply in a year.
The biggest demand driver is e-commerce. Amazon is by far the largest driver. Retail sales are expected to grow to 39% of the all retail over the next several years.
Final mile logistics is the biggest area of change. Walmart and Target are extremely effective omni-channels with instore pickup. Some independent third party fulfillment centers are coming into the market to provide omni-channel logisitics fulfillment and last mile inventory.
There are very few distressed properties appearing in industrial. Those that are appearing on the market are typically owner-occupied properties where the seller needs liquidity elsewhere in their business. In fact, this mirrors what I’m seeing as well. A friend of mine was looking at a manufacturing company with a weak balance sheet that was looking to do a sale lease-back of the factory.
Amazon is the elephant in the industry. The company has grown from adding 25 million square feet of space per year, to more than 50 million square feet of new capacity per year.
Amazon has grown from 70 to 255 operational delivery locations. In the coming year, Amazon has 45 new sites. They are mostly non sortable fulfillment centers. The sortable facilities are multi-story facilities. The sortable facilities ae more efficient because they have air conditioned space. Market rent is attributed to usable square footage. But the expenses are lower.