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Industrial Market Headed For A Downturn, New Report Finds

For now, industrial real estate is the commercial property asset class most in demand, but its time as a commercial real estate darling will be limited, a new report by NAIOP predicts.

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Though industrial has done well in the short run because of a spike in e-commerce, broader economic indicators point to a drop in demand for industrial space during the third quarter of 2020, with a recovery not until mid-2021 or later, the report says.

In fact, NAIOP predicts that net U.S. industrial absorption will be negative in a big way when the Q3 2020 numbers are ultimately crunched: 141M SF. In Q4 2020, the report forecasts net negative industrial absorption of 72M SF, followed by negative absorption of 27M SF in Q1 2021. 

Only in the second quarter of next year will demand for industrial space make some kind of recovery, albeit a weak one. Pre-pandemic absorption levels will not return until at least the beginning of 2022, NAIOP predicts.

In the context of the pandemic-inspired recession, which saw an annualized contraction of the U.S. economy of about 33% during Q2 2020, the e-commerce boost for industrial absorption is thus something like a sugar high. Pronounced but ultimately short-lived.

"Real-time indicators of economic activity, as well as academic forecasts of growth, highlight the headwinds currently facing the U.S. economy,” wrote the authors of the report, Hany Guirguis of Manhattan College and Timothy Savage of New York University.

Besides waning demand for consumer goods, there will be disruptions to global supply chains and trade, the report points out, resulting in less manufacturing and construction, as well as fewer open retail stores needing goods.

For now, however, online retailers have been leasing industrial space with great gusto, especially in their long-standing quest to find last-mile facilities. In suburban Chicago this month, for example, retail giant Amazon inked a deal for two buildings totaling about 600K SF.

"Amazon.com was the difference maker during the second quarter of 2020,” Colliers International reported in its Q2 2020 industrial report for Chicago. “The e-commerce giant committed to an astounding 11M SF in 10 buildings."

The West Coast is seeing large transactions as well, Cushman & Wakefield Executive Director Robin Dodson said.

“Lease renewals were trending towards shorter term at the start of the pandemic, though we are now seeing many companies staying in place with long-term renewals of five to 10 years,” she told Bisnow.

Investors also are still keen on industrial properties. In Dallas this month, a partnership between VEREIT Inc. and Korea Investment & Securities Co. acquired a 2.3M SF distribution and warehouse facility.