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Despite Uncertainty, Industrial Leaders Feel Positive About 2020

Despite uncertainty, some industrial real estate experts are optimistic about how the rest of the year might look. 

Coronavirus is looming large over every sector of business, and Bisnow’s Denver Industrial Boom event Tuesday kicked off with a discussion about how the virus, officially classified a pandemic Wednesday, has impacted global supply chains. Because much of industrial real estate is involved in both national and international manufacturing, shipping and trading, the coronavirus has had an impact on these supply chains.

Despite Uncertainty, Industrial Leaders Feel Positive About 2020
Charlie McLean, John Comunale, Kevan O'Connor and Brandon Kramer

“The fear is real,” Comunale Properties President John Comunale said. “And it’s 11 years into expansion.”

He raised the question if this could be the catalyst that changes the cycle of expansion. Fear could slow down leasing of industrial product in the short term, which could end up delaying construction starts. 

But, Comunale pointed out, it’s hard to speculate when the news about coronavirus changes so rapidly. At this point, it is mostly guesswork. 

SunCap Property Group Vice President Kevan O’Connor said ports are back open in China and containers are moving again. Despite the backlog that exists, O’Connor said in time he expects things to normalize, and said hopefully the market will see a “v-curve rebound” in the next three to four months. 

“I think it’s going to create some interesting investment opportunities,” said Brandon Kramer, senior associate and associate director of the National Office and Industrial Properties Group at Marcus & Millichap. “There is a silver lining — a positive — that could come from this.”

The current fiscal climate, with the Federal Reserve cutting interest rates and the drop in Treasury yields, coupled with a potential fear-driven downturn, could create a multitude of investment options, he said. 

“In the overheated environment we went into with this, it’s not necessarily a bad thing to have a little bit of a slowdown,” Kramer said. 

Industrial real estate relies on far-reaching global supply chains. When asked if the impact of the coronavirus could possibly shift reliance to something more local, Kramer said that Denver, to a certain degree, is slightly insulated from the coastal effects. He added that for the last 10 years, Denver has “been on a tear” on attracting millennial talent, increasing population and graduating from a tertiary to a secondary city. 

“I don’t think we’re going to experience a huge downturn; if anything, it normalizes a little bit and allows investors better access to the market,” Kramer said. 

Essentially, current or expected impact of the virus isn’t enough to change Denver’s industrial real estate market that dramatically. 

Despite Uncertainty, Industrial Leaders Feel Positive About 2020
Kyle Ellington, Joel Scott, Megan Turner, Paul Hyde, Courtney Schneider

In addition to the coronavirus, there are other macro factors at play that could affect the market, including the presidential election, panel moderator and ARCO/Murray Business Development Manager Charlie McLean said. 

Uncertainty is typical before elections, and Comunale said uncertainty makes people think twice before big decisions. He thinks that the metro could experience “short-term blips,” but overall the market is in a good spot.  

O’Connor said the industry saw a similar situation in 2016. Renewals will happen, he said, but he has witnessed a slowdown on new requirements to market during an election year. 

“We saw decision-makers take their time, vet it, and maybe wait until January or February time frame to see what new policies would be instituted,” he said.

Kramer echoed those sentiments. He said it is likely that if there is no change in the presidency, there could potentially be “another rally in the market” like the one that happened in 2016. 

Couple all of this with lower interest rates, a little bit better pricing on buildings, and then another boom in the economy post-election, it’s going to create an environment that’s really favorable to investors,” he said. 

Denver has had 39 straight quarters of positive net absorption. Due to this and other great fundamentals Denver’s industrial real estate has, there is a lot of capital chasing deals in Denver. Bisnow reported in February that 2019 saw $102B total volume in industrial real estate sales

“I think if supply stays in check, Denver’s got some more room to run,” Comunale said. “Every day you see another national developer poking around for a project in Denver.” 

Though land sites are tough to come by in Denver and capitalization rates continue to compress, Comunale said there is still a good opportunity to make money in the market. 

O’Connor said Denver has really come into its own in terms of becoming a more secondary market than a tertiary one. Prior to this cycle, the metro area didn’t offer a lot of great, high-class industrial product, he said. Now with a lot more supply and continued positive net absorption, there is still good momentum behind it all. 

“In terms of investment, there’s an insatiable appetite amongst lenders and capital to be in industrial,” he said. “We are now finally the belle of the ball.”