Warehouse Owners May Feel Less Pain in Virus Pandemic Than Other Landlords
State of the Market Video: Shutdown Hastens Move Toward E-Commerce, At-Home Delivery
Warehouse owners may fare better than other commercial property landlords, but they are almost certain to face higher vacancy rates and the end of a five-year run of rent growth this year because of the coronavirus pandemic.
On one hand, the unprecedented shutdown of American businesses is causing an uptick in online ordering and quick home deliveries that require growing warehouse space. Tens of millions of U.S. residents are self-isolating and staying away from malls, restaurants and other public places that are closed to shopping and dining for an unknown amount of time. That's accelerating the shift in shopping habits to online purchases and away from physical stores, Abby Corbett, a CoStar managing director and senior economist, said in a special update on the U.S. industrial property outlook.
On the other hand, worldwide supply-chain disruptions combined with drastically reduced spending by consumers and businesses are expected to cause a pronounced slowdown in new leasing as cautious businesses pull back, Corbett said. Logistics companies may need to repurpose warehouses used for furniture, electronics and other discretionary goods to store food and other household staples. Pharmaceutical, medical supply and food-related tenants may lean toward signing shorter duration leases ranging from six months to a year to accommodate the surge in demand.
The leasing pullback in the middle of a still-hefty pipeline of industrial projects under construction may give more negotiating power to tenants, as a five-year run of annual rent growth almost certainly ends this year, Corbett said. Despite pandemic-related construction halts in some areas, new industrial supply is still expected to hit a 10-year high this year at a time that many cities were already experiencing higher vacancy rates for larger warehouse spaces. Even before the crisis, some markets were struggling to absorb all the warehouse space built over the past couple of years.
Industrial markets near the ports of Los Angeles and Long Beach on the West Coast, as well as the cities of Atlanta, Baltimore and Charleston, South Carolina, on the East Coast, may have trouble filling some newly built distribution centers as the flow of imports slows from other parts of the world. While some tenants may put their expansion plans on hold, CoStar analysts don't expect to see many companies around the United States give up their warehouses this year.
Factory disruptions may trigger an increase in subleased manufacturing space. However, CoStar expects to see manufacturing and warehouse operations become more essential after the crisis, as firms and retailers look to bring supply chains back home and increase their inventories.