As expected, the pandemic-induced deceleration of market activity in the second quarter continues to impact all sectors of commercial real estate. While some sectors experienced record drops in transaction volume, the U.S. industrial sector remained sound as mid-year 2020 activity fell a mere 8.8% from the same time last year. The increasing reliance on e-commerce for basic goods fueled demand for industrial bulk space (100,000 square feet and greater) as supply chains continue to be right-sized, shifting away from the former “lean” inventory strategies. As evidence of the need for warehouse and distribution space, despite the global pandemic slowdown, U.S. occupier activity in bulk industrial space totaled nearly 243.7 million square feet at mid-year, down slightly from the 267.3 million square feet transacted at mid-year 2019. Further indication of the increased need for bulk space lies in the rising size of occupier transactions. The average size of a bulk transaction was roughly 278,000 square feet, up 20% over the average size of 233,000 square feet in 2019, and 7% over the first quarter of 2020.
While overall industrial activity was running below the 2019 mid-year pace of 1,145 transactions, 875 transactions including new leases, renewals and user sales were transacted at mid-year 2020. It comes as no surprise that during the first six months of 2020, Amazon nabbed the top spot of bulk occupiers in the U.S., occupying a whopping 26.9 million square feet. In just the second quarter alone, Amazon occupied 20.9 million square feet – the highest quarterly growth by the company thus far. In fact, at mid-year 2020, Amazon has already transacted more space than they did in 2018 or 2019. Both Home Depot and Lowe’s Home Improvement remained in the top 10, occupying 5.0 million square feet, and 3.1 million square feet, respectively. This magnifies the trend of increased home improvement projects during the pandemic as many states upheld stay at home orders during the second quarter.
E-commerce only occupiers, like Amazon, accounted for 20.9% of transactions during Q2 2020, exceeding third-party logistics and packaging companies (3PLs). However, when combined with Q1 2020 totals, e-commerce falls to 14.1% of total transactions as 3PLs accounted for 23.0% of all transactions at mid-year. We expect Amazon totals to remain raised through the end of the year as Amazon’s expansion plans persist with the persisting strains facing traditional brick-and-mortar businesses. While 3PLs were the top overall occupier, for all the reasons mentioned above, e-commerce companies nearly doubled its space occupied at mid-year and occupied 34.3 million square feet — marking the highest year-over-year market share increase. The manufacturing and data centers/tech/R&D industries also marked increased market share, at 38.8% and 8.7%, respectively.
Transactions in the Midwest accounted for 31.4% of all bulk occupier activity, followed by the Southeast with 24.2%. The South Central market activity was the slowest at mid-year, accounting for 11.0% of transactions signed, with the Northeast market following closely behind, responsible for 12.9% of activity. The Midwest continues to attract bulk occupiers to take advantage of its strong labor, transportation, and logistics benefits, with e-commerce users taking 8.8 million square feet in Midwestern states. Amazon expanded by 6.0 million square feet in the Midwest during the first six months of the year. Population, labor growth and relatively low business costs continue to fuel activity in the Southeast region, while the West region remains in third, thanks to continued strong demand in the Inland Empire, boosted by surging e-commerce demand and 3PL activity.
As many industries continue to contend with falling demand, declining profits, and reduced personnel, transaction volume for bulk industrial space is expected to remain stable. Economic bright spots began to emerge at the end of the second quarter, a positive indicator that a slow and steady recovery is on tap for the U.S. economy. As a result, bulk warehouse/distribution will remain in high demand by e-commerce retailers and manufacturers of medical and personal care products, a trend that bodes well for industrial real estate and bulk space, despite the ongoing global pandemic.
Company Type Description:
- Construction, Improvement and Home Repair – Warehousing and distribution of materials used in residential and commercial construction, improvements and repair, could contain some e-commerce components.
- Data Centers, Tech and R&D – The use of industrial space for data centers and non-pharmaceutical R&D purposes.
- E-Commerce Only – Warehousing and distribution of product that is ordered online and shipped directly to the end consumer only.
- Food, Beverage and Pet Supply – Manufacturing, warehousing and/or distribution of food and beverage related products. Could contain some e-commerce or manufacturing components.
- Furniture and Appliances – Warehousing and distribution of retail and/or wholesale furniture and appliance products. Could contain some e-commerce and or manufacturing components.
- General Retail and Wholesale – The warehousing and distribution or retail and/or wholesale products not listed in any of the other categories. Could contain some e-commerce or manufacturing components.
- Manufacturing – Industrial space used for manufacturing and/or storage of raw materials and equipment used in the manufacturing of non-automobile related products.
- Motor Vehicles, Tires and Parts – The warehousing, manufacturing and/or distribution of motor vehicles, tires, and related parts and materials.
- Third-Party Logistics and Packaging – Third-party logistics (3PL) and packaging of a wide variety of products, could contain some e-commerce components.