While the pandemic forced many office buildings, retail stores, and other commercial spaces to shut their doors (at least temporarily), one sector of commercial real estate has been thriving, seeing one of their best-performing years to date — industrial real estate.
The Shift to E-commerce
Since the pandemic started, the demand for delivered goods has seen an incredible surge. Retailers scrambled to modify their business models, accommodating the shift to e-commerce as the majority turned to the online domain for both essential and non-essential purchases.
Now, more than a year after the pandemic began, e-commerce continues to see massive growth even as COVID restrictions loosen. So while brick-and-mortar businesses begin to reopen their doors, many consumers continue to opt for the convenience and safety that online shopping and delivery offers.
E-commerce rose sharply from 14.8% in Q1 up to 44.5% in Q2 and is only expected to grow.
To meet this increased demand in the e-commerce sphere, companies leased out more space and bought more industrial real estate to expand their fulfillment centers, distribution facilities, warehouses, storage, and manufacturing space.
At the beginning of the pandemic in the first quarter of 2020, industrial leasing in the U.S. saw a three-year high. Industrial real estate has only grown since then, enjoying a historical appreciation rate with industrial property values up 7.4% compared to the previous year.
New Construction in Industrial Real Estate
To meet the shifting needs of consumers and companies, new construction in industrial real estate is also on the rise, particularly for creating more storage space.
The demand for storage space is expected to reach 250 million square feet in 2021. This is higher than the previous five-year annual average of 211 million square feet.
And as more and more people flock online to make their purchases, warehouses and fulfillment centers struggle to keep up with inventory. (Many of us soon won’t forget the rows of empty store shelves and the scramble to find a roll of toilet paper in the early days of the pandemic.)
Just-in-time (JIT) Inventory Practices
Those fulfillment operations that employ just-in-time (JIT) inventory practices, in an attempt to reduce costs, found they couldn’t keep enough stock for the demand brought on by the pandemic.
Now, to avoid the consequences of a similar supply chain disruption in the future, many are constructing new spaces to store additional inventory.
Converting Office Spaces & Retail Centers
Existing office spaces and closed retailer centers are also being overhauled and converted into storage and fulfillment centers. This has especially been the case for last-mile logistics. Repurposing existing real estate into local, micro-distribution centers helps make deliveries fast, flexible, and safe.
While the pandemic created an opportunity for industrial real estate to see immense growth, this sector will continue to be a strong asset for years to come, even when we’re on the other side of COVID-19. Shopper behaviors have shifted dramatically and will continue to trend towards online shopping and home delivery.
Pandemic Shopping Behaviors
And with more and more workers transitioning from in-office settings to permanent remote positions or a hybrid model, their at-home, pandemic shopping behaviors won’t be changing anytime soon.
To meet consumers’ ever-evolving needs, we’ll continue to see rising demand in industrial real estate from fulfillment centers and warehouses to storage and manufacturing facilities.
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