How Brokers Do Business During the Pandemic in Top Industrial Areas

The coronavirus pandemic ripping through the U.S. economy is even hitting industrial real estate, a property type that's benefited people shopping from home. But that hasn't prevented brokers from focusing on the positive to pitch opportunities.

Jack Fraker, vice chairman and managing director of CBRE's capital markets group, said he increased annual growth projections for U.S. industrial real estate to 20% from 14% over the next five years. He cites the coronavirus spurring online ordering and the resulting need for distribution centers to get the goods shipped to doorsteps.

"The e-commerce and online shopping sector will grow at a much faster pace, meaning many more distribution centers, measuring in the hundreds of millions of square feet over the next five years," said Fraker, who surpassed $25 billion in deals last year with his team, in an email. Companies will "lease 5% to 10% more warehouse space than the immediate requirement in order to keep additional inventory available in case of future supply disruptions.”

CoStar News looked atfive areas across the country where the most new industrial construction was scheduled to come online over the next two years, based on a Cushman & Wakefield industrial outlook report from January on long-term demand. The firm said it plans to update its report once the pandemic situation solidifies, but until then the report provides a snapshot of the industry.

The markets were Dallas-Fort Worth with 46.3 million square feet, the Inland Empire at 45.7 million square feet, Atlanta with 34.9 million square feet, Chicago's 32.3 million square feet and Pennsylvania's Interstate 81-78 corridor with 26.5 million square feet.

Here’s how brokers in those areas are conducting business during a pandemic.

Dallas-Fort Worth

Jackson-Shaw, a national developer, is taking advantage of a Texas decision to allow construction during the crisis to start work on 46 Ranch Logistics Park in Fort Worth.

"We want to be ready to go when the market is ready," said Michele Wheeler, president and chief operating officer of Jackson-Shaw.

The 2.2 million-square-foot industrial park in Fort Worth, Texas, shows a focus on trying to move forward.

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“The construction industry has continued to operate instituting a lot of procedures," she said.

The 169-acre site in Fort Worth is one of the last rail-served land tracts remaining in south Fort Worth large enough to accommodate logistics hubs.

"We are thinking long term," she said. "Primary markets with great locations are ultimately going to be the ones that recover first."

The speculative project is scheduled to be complete in mid-2021.

For nearly a month, Wheeler and her team at Jackson-Shaw, which has about 60% of its portfolio devoted to industrial real estate, have worked at home as they look at where they can move forward.

“Showings are nonexistent and people aren't looking at properties. Leasing activity is slow as people are trying to figure out their space needs and businesses have been impacted,” said Wheeler.

Inland Empire

Just-in-time delivery, once a golden rule for logistics companies, will become "not-so-quickly" delivery, said Paul Earnhart, senior vice president of Lee & Associates in Ontario, California.

Companies will hold on to inventories during the pandemic until a stable national supply chain returns, he added.

"Many people have also been drawn in further to online retailing, which is all done out of warehouses today," he added. "This will result in increased demand for space."

One place such a change may play out is in California's Inland Empire, a part of the Los Angeles basin that was once known for excess warehouse space where the supply has tightened up as demand surged, Earnhart said.

"Typically, we've had a lot of inventory, but that's not so much the case now with an extremely low vacancy rate in the Inland Empire," he added. "Those building new product have been well disciplined."

This month, Earnhart closed on a deal for a 425,000-square-foot lease to a food packaging company, completing a project that was well underway before the pandemic.

From the first quarter of 2018, the Inland Empire has had 31 quarters of positive net absorption and a 16.9% hike in effective lease rates for buildings under 100,000 square feet of space. A big share of the demand is driven by online retailers and third-party logistics providers looking for warehousing space for e-commerce fulfillment.

Atlanta

E-commerce retailers are moving quickly to scoop up big blocks of industrial space in the Atlanta area to help meet the growing demands of the online shopping economy created by the pandemic, said Nathan Anderson, president of NAI Brannen Goddard.

"Companies like Amazon are taking up large blocks of space as quickly as they can and they want to be in there yesterday," Anderson said in an interview.

Anderson and Darren Butler of NAI Brannen Goddard recently leased Amazon 1.1 million square feet of industrial space spanning two buildings, including 5000 Lanier Islands Parkway and 920 Logistics Parkway in Buford, Georgia, which is about 38 miles outside of Atlanta. The brokers represented the landlord, IDI.

Even with the big e-commerce and logistics deals, Anderson said the industrial market in Atlanta has been affected by the coronavirus. The area's medium-size deals are being put on "pause" by firms wanting to see how the pandemic plays out, he said.

"In Atlanta, a lot of these bread-and-butter deals of 50,000 square feet to 100,000 square feet are being put on pause to see what happens to the market in the next 60 to 90 days," said Anderson. "They will wait and make business decisions based off what happens, which is hard to predict. It could be a flush of positive news if the virus goes away in the summer or it could stall things."

The pandemic could shift some deals to later in the year, he said. Either way, Anderson said he believes Atlanta will remain a top market for new construction and will bounce back from the pandemic quickly.

"They are still building and developing as we go through this," he added. "No one is laying down their hammers."

Chicago

On the rare occasions Avison Young Principal Steve Kohn is touring with his clients in Chicago, one of the first U.S. cities to institute a stay-home order as the number of coronavirus cases escalated throughout the country, they show up in different cars, nix the tradition of shaking hands and mind each person's physical space, careful not to intrude on anyone's 6-foot bubble. In Illinois, real estate is considered an essential business, so tours practicing social distancing are allowed.

"Everything has changed and nothing has changed, all at the same time," Kohn said in an interview. "Despite the shelter in place and social distancing, we are still showing some spaces and we are processing deals. Avison Young, like most large companies, are telling their people to do as little as possible and stay home, but our customers need us to work."

The directive from the Canadian-based brokerage firm has some teeth with Kohn's actual person-to-person real estate business dwindling down to about 20% of what it was pre-pandemic. Most landlords won't allow tours in buildings unless they are vacant to help tenants keep a safe distance from other people, he said.

One of Kohn's clients has a lease expiring in August and the landlord won't budge from offering a short-term extension. So, during the pandemic, they are shopping for a building to buy.

"There's a level of activity that just isn't going away, regardless of what happens," said Kohn, who has been in the business 23 years.

Kohn said about a third of the deals in the Chicago market are expected to reach the goal line. Another third have stalled, while the remaining deals in progress have died, he said. Land acquisitions for new projects at infill locations seem to be among the deals being hindered by the pandemic, he said.

"Most of the deals teed up in Chicago were projecting rents that were pretty high because the market was so hot," he added. "Now, the question is, what are those rents going to be? If it doesn't match the rents on the pro forma, you can't pay the same amount for the land.

"For land to turn into an industrial property, that's at least a year out and that puts you in uncharted territory," he added.

Eastern Pennsylvania

With the pandemic putting a focus on stockpiling medical supplies in the United States, Brian Knowles, founding principal and president of Lee & Associates in Eastern Pennsylvania, said he hopes the country "makes a real effort" to bring manufacturing, especially involving medical materials, back to the country.

Knowles, who works on deals throughout Pennsylvania, New Jersey and Delaware, said the consumer mentality has changed with the coronavirus, which could bode well for the Lehigh Valley, a hotbed for industrial development.

"The Jersey Turnpike area has never been in a healthier position with low vacancy rates and escalating rents," Knowles said in an interview. "This puts us in a place, when we do turn a corner that medical supply manufacturing theme could come to fruition. This will be where operators and companies go, Eastern Pennsylvania. But who knows how long it takes for that wheel to turn."

The Lehigh Valley and South Jersey industrial markets are healthy with low vacancies and escalating rents, Knowles said. Those positive market fundamentals have helped drive millions of square feet of new construction in recent years.

That new construction, originally slated to hit the Pennsylvania-area markets, were cued up to hit in the second quarter of 2020, he said. With the pandemic, those construction schedules will likely kick completion dates back to the third quarter.

"A lot of new inventory is coming online in the region," Knowles said. "Not just in Lehigh Valley, but all over. We will just have to wait and see what it does to the market."

Until market dynamics settle down, Knowles said, new ground-up industrial projects will probably dwindle as developers wait to see if the new construction and supply in the pipeline lands leases by tenants in the wake of the pandemic. That hesitation in stocking the development pipeline could interrupt what has been a steady supply of new industrial buildings.

"Things might now change," he added. "If you are a tenant, you are not going to have many choices here without a lot of new product coming online. This might put an even tighter squeeze on tenants."