Though it is nearly universally consideredthe strongest real estate sector, the COVID-19 crisis nonetheless has manywondering what the future hold for the industrial market. Last week, REjournalshosted a webinar to address that very question.
The speakers on the webinarincluded Corey Chase, senior managing director, NewmarkKnight Frank; Alfredo Gutierrez, president and founder Sparrowhawk; Chris Moore, director ofproject development, FCL Builders and KenVerne senior vice president asset management, BridgeDevelopment Partners.
It may seem as if the pandemichas been going on for ages, however we are still very early in this crisis.There will be long-term impacts, but when it comes to construction project sofar, it has been more or less business as usual—or as usual as can be expected.
“We have a pretty solid backlogcurrently and our estimating pipeline is full,” Moore said. “Here in theMidwest we’re seeing more build-to-suit opportunities than speculativedevelopment—though we did just receive a contract on a new million-square-footspec facility here in Chicago, so I guess that kind of goes both ways.”
On the management/brokerage sideof things, fault lines are showing much quicker. Chase reported that mosttenants made their rent obligations in April, though May and June may be adifferent story if those tenants start to dip too far into their reserves.
“We’ve got over 80 tenantsthroughout our portfolio and almost half of them have reached out asking forsome level of concession,” said Verne. “We’re happy to help If we can, but wewant to be sure … that we’re not the only answer.”
Rent is a large line item forbusinesses, but by no means their only one. Verne said that landlords shouldwork with tenants to make sure they are using a multi-step process to reducecosts, including taking part in the Paycheck Protection Program, reducingpayroll, or seeking concessions from other vendors.
“I’ve been talking to severaldevelopers over the last 30 days and we all agree that the industrial marketwill be the first bounce back. But there are a lot of tenants out there thatare struggling, at best,” said Chase. “Next month I’ll be celebrating my 35thyear in the business as a broker, so I’ve been through several of these changesin the in the market.”
The tool that has worked the bestduring past downturns, according to Chase, is the “blend and extend” practice.If a tenant has a few years remaining on their lease, a broker can approach thelandlord and ask to bring the rent in line with what is now the going market rate;in exchange, the tenant will extend the term of their lease. This is a win-win:the landlord can keep a space occupied for longer and the tenant gets thebenefit of a rent reduction.
According to Gutierrez, a numberof manufacturing jobs that were lost to China and other overseas locations werealready starting to return to American shores. The COVID-19 crisis may hasten someof those homecomings.
“Manufacturing is coming back,” said Gutierrez.“The need to have a supply chain closer to the customer base is particularly conspicuousin a situation like this, but it was already starting to slowly come back.”
With empty containers spread out through NorthAmerica and Asia, it’s clear that the manufacturer-to-consumer supply chain is notfunctioning efficiently right now. Reshoring those manufacturing jobs is oneway to shorten the supply chain. If this scenario plays out, smaller, Class Binfill properties may become a higher priority.
The speakers touched on the supply of specwarehouses that have exploded in recent years—and how long it will take to fillthose spaces in this current climate. Verne acknowledged that these propertiesmay take longer to lease up, so Bridge has been building out spec suites withinmany vacancies to help them move more quickly.
In terms of the “new normal,” everyone isstill trying to figure that out and it changes almost daily. But according toChase, there is one occurrence from our nation’s recent past that may informhow COVID-19 may impact future development.
“I see this as a similar pattern to what wesaw in 1990 with the American Disabilities Act,” Chase said.
While most take it for granted these days, the ADA legislation mandated certain building features, such as larger elevators, wider hallways and ramps to accommodate wheelchairs. Buildings had to make expensive upgrades to comply, and we may see something similar whereby properties will have to provide sanitation stations, install turnstiles, disinfect HVAC components or take other measures. Like the ADA, the office sector would be the hardest hit by these measures, but industrial properties would not be immune. The speakers touched on a number of other topics, including the state of cold storage, industrial construction financing and the crisis’ impact on e-commerce logistics. Check out REjournals.com or our social media streams to make sure you know about all of our upcoming webinars.
