Relative Stability in Industrial Sector Buoys CRE Industry

by | 30 November 2020

As the U.S. economy stalled in late Q1 due to effects of the novel coronavirus, most if not all commercial real estate sectors saw transaction velocity slow to a near halt. Since then, industrial activity across the nation has begun to steadily rise month over month, and the Minneapolis-St. Paul market is no exception. Tenants are slowly venturing out in search of much needed space for their growing companies, while owners and buyers are seeking out opportunities in a competitive market.

In April and early May, most industrial activity in the Minneapolis-St. Paul market pertained to renewal transactions already in the pipeline, but in late May and June prospects looking for new space and existing tenants looking to expand entered the market as well. These local trends match national industrial data for the period. NAIOP’s June survey (the organization’s third national tracking survey published since the pandemic began to play a major role in CRE transactions) showed a steep increase in in industrial development nationwide, going from a reported 18.5% of respondents noting new development or redevelopment projects in April to 43.2% in June. Additionally, 70.7% of participants in the survey reported they were seeing industrial property acquisitions take place in the market, an approximate 12% increase from April. Also notable is that less than half (49.4% of survey) recipients noted a decrease in leasing activity in the market post-COVID, a slight decrease from 57.2% in April.

Industrial is becoming the backbone of the commercial real estate industry largely due to the increasing importance of e-commerce. While we’ve been monitoring the e-commerce trend for years, the COVID-19 pandemic has heightened its allure to the American consumer and accelerated its growth at an impressive rate over the last few months. In response, the industrial sector has also had to change its gradual shift to a quick pivot. As Thomas J. Bisacquino, president and CEO of NAIOP, stated in the report, “The pandemic has fundamentally changed the ways that we work, shop and live. For e-commerce, this means a greater dependence on the delivery of products and higher demand for the industrial/warehouse sector.”

As online sales grow, industrial space users have realized that more product is needed in “last mile” fulfillment centers. Accordingly, demand for industrial space has grown, especially in the logistics and fulfillment submarket, and as tenants that are tied to e-commerce operations scramble for more space, investors are eyeing the market with new interest. E-commerce has already been growing in retail market share at approximately 1% per year over the past decade (from 4% of sales in 2010 to 11% in 2019) per the Federal Reserve, and it’s logical to expect continued growth in the area at perhaps an accelerated rate due to current pandemic considerations.

This is not to say all industrial sectors are bullet-proof. Medical device makers saw a large decline in sales due to non-elective surgery bans, and showroom tenants also saw a steep decrease in traffic due to retail closures along with consumer wariness. As our local guidelines begin to ease up, we expect to see these submarkets rebound as well, while other e-commerce-related submarkets will continue to provide a strong backbone of confidence and help buoy the market.