CBRE report points to ongoing industrial construction during Covid-19 pandemic

Despite the chilling effect the ongoing COVID-19 pandemic has had on myriad aspects of the United States economy and supply chain- and logistics-related components of it, one area still with some momentum is industrial construction.

That was the thesis of research issued this week by Los Angeles-based industrial real estate firm CBRE.

In a new research report, entitled “Industrial Development Slows Due to COVID-19-Related Delays,” CBRE found that 80%—or 16 out of 20—of the top U.S. markets for under-construction space, which represent 70% of total under-construction national inventory, have workers active and on site for essential projects. And it added that only four U.S. markets—Pennsylvania’s I-78/81 Corridor, Philadelphia, Central New Jersey, and Oakland—are currently the only markets that have shuttered construction sites, with waivers able to be granted in Pennsylvania and New Jersey “if the construction is for buildings that will distribute essential product.”

As for the impact of COVID-19 on industrial real estate, CBRE noted that it has reduced leasing activity for the 309 million square-feet, a record, under construction at the end of 2019. What’s more, before COVID-19, CBRE said there were minimal fears regarding vacancy rate increases, due to robust demand for first-generation space, with more than one-third of this new construction having already been committed by occupiers at the end of last year.

Another factor impacting the market brought on by COVID-19, according to CBRE, is that speculative construction projects have are now on hold, to a large degree, and will, in turn, result in less first-generation space entering the market in 2021. The firm said that could result in the overall vacancy rate slipping to pre-COVID-19 levels towards the end of 2021 should there be a rebound in business activity by the end of 2020.

James Breeze, Senior Director, CBRE Global Head of Industrial & Logistics Research, said in an interview that the current first quarter 2020 vacancy rate—at 4.5%—is what he would consider the pre-COVID vacancy rate, which was the rate at the end of March, when the virus began impacting the U.S.

When asked what sectors, at this time, are showing the most demand for warehouse and distribution facilities, Breeze pointed to the following three sectors: essential goods via e-commerce; food and beverage for direct to consumers or to supply grocery stores; and medical supplies.

“These sectors are leading the way because consumers are mostly staying at home and buying necessary items online or at the very least buying more food at grocery stores to prepare at home because of the closing of most restaurants,” he said. “Due to the general uncertainty of the U.S. economy, most non-food purchases are for essential rather than discretionary items, so mostly companies that deal with essential items are staying in the market. Finally, there is massive demand for medical supplies from medical facilities and the general populace, which is keeping demand strong for companies who supply these products.”

At the moment, there are various obstacles impacting the pace of industrial real estate development, according to the report, including things like completing onsite inspections, project timelines delayed and extended because of challenges related to completing onsite inspections, reduce construction crews due to social distancing guidelines, and delays in procuring and transporting construction materials.

Looking ahead what direction industrial construction activity may head in post-COVID, Breeze said it is not likely to be up or down but, instead, somewhere in the middle.

“While developers will gage demand before rapidly commencing speculative development, the current inability to break ground on speculative projects will create a lack of newly constructed space hitting the market the second half of 2021,” he said. “This lack of available first generation space will make breaking ground on new product post-COVID less of a risk.”