Industrial developer Jose Hernandez-Solaun of The Easton Group has seen Amazon spur the rise of e-commerce over the last few years. But now, he sees the coronavirus pandemic rapidly ramping up that growth — putting it on steroids.
“What we are finding now is the coronavirus effect,” said Hernandez-Solaun. “If the Amazon effect was strength training, this was what you get on performance-enhancing drugs.”
Hernandez-Solaun and other South Florida industrial brokers and developers say the sector could benefit in the long-term from many of the behavioral changes spurred by the crisis. Consumers, increasingly from older generations, will shift more of their spending to e-commerce. More manufacturers will come to the Americas from China. And after experiencing inventory shortages, more warehouses will be needed, experts say.
“The need to address all of the delivery online in the new economy is even more demonstrable by what happened here,” said attorney Jay M. Sakalo, a partner with the business finance & restructuring and corporate practice group at Bilzin Sumberg in Miami. “The outcome will be that industrial will be even stronger.”
Across South Florida, industrial has been one of the hottest asset classes in recent years. The area is strategically positioned as a logistics hub between Latin America, the Caribbean and the United States. It also has limited land for developers to build new warehouses, making industrial properties increasingly valuable to investors.
The strength of South Florida’s industrial market has led behemoths like Blackstone Group and Prologis to acquire properties throughout the region in recent years, pushing up industrial prices. As of late last year, Blackstone had purchased 36 properties in South Florida for a total of more than $417 million.
Times were good for industrial real estate before the coronavirus crisis, with completions reaching an all-time high in Miami-Dade County in 2019, according to a recent report by Avison Young. But now activity could pick up even more.
Since the coronavirus pandemic started, industrial broker George Pino of State Street Realty has seen leases increase from tenants in the logistics and transportation industry, specifically near Miami International Airport, ranging between 10,000 square feet to 150,000 square feet.
Riding out the storm
In addition, national industrial real estate investment trusts are faring much better than other asset classes.
Prologis, a real estate investment trust with a market cap of $60 billion and a global portfolio that spans 964 million square feet, saw a jump in lease signings. In March, lease signings increased 16 percent year-over-year, with two-thirds of activity occurring in the second half of March, Gene Reilly, the company’s chief investment officer, told analysts during a recent conference call. About 40 percent of the increase came from e-commerce. As of the market’s close on Wednesday, the company’s stock is up 1 percent since the beginning of March.
Indianapolis-based Duke Realty Corp., which operates and owns 155 million rentable industrial square feet, has seen its stock remain about even since early March. And Atlanta-based Americold Realty Trust, an operator of cold storage facilities, saw its stock rise about 2 percent since the beginning of March. That compares to a nearly 10 percent decline of the S&P 500 Index.
The industrial sector is also different because many leases are long-term, unlike shorter-term contracts in retail. That means short-term disruptions might not have as big of an impact on the industry. And some leases are still closing during the pandemic, brokers say.
Challenges remain
Despite the rosy long-term outlook, there will still be some pain in the industrial sector.
As the hospitality industry suffers, and the majority of hotels and restaurants are closed or operating at minimal capacities, warehouse distribution is also taking a hit.
“Anybody distributing to restaurants is having a tough time,” said industrial broker Steve Wasserman of Colliers International South Florida. Shuttered clothing retailers are also impacting the market, filling warehouses with soft goods, he added.
More demand for space may lie ahead.
Wasserman expects grocery stores to look for 5 percent to 10 percent more space in new leases in the future. And Pino, of State Street Realty, is seeing a growing demand for new cold storage warehouses with technology that allows for automation, resulting in fewer employees working closely together.
Hamid Moghadam, CEO of Prologis, said companies’ overall inventories could increase by 5 percent or 10 percent to combat the possibility of future shortages. Moghadam and others also said they expect more manufacturing could come to the United States from overseas.
Yet while demand from institutional buyers remains high, the pandemic has created uncertainty, causing investors to wait it out, Wasserman said.
“There’s still a lot of capital out there, but people out there are trying to define what the debt market looks like, the cap rates,” he said. “Unless they’re getting a perceived discount, they’re going to hold off for the time being.”