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Experts: Industrial Sector Will Remain “Darling” of Puget Sound Commercial Real Estate Industry

Puget Sound Industrial Summit, The Registry, Colliers International, Kidder Mathews, Amazon, Elion Partners, O’Keefe Development
Image Courtesy of Hannes Egler

By Meghan Hall

Despite facing its own challenges over the past few months as the current pandemic has taken root throughout the Puget Sound, the industrial asset class has continued to hold its own. Bigger players never let their foot off of the gas, and smaller businesses and investors are quickly coming back to the market after a brief hiatus, signaling good things for the industrial sector in the years to come, according to four different industry professionals at The Registry’s recent Puget Sound Industrial Summit.

“Industrial will be the long-term beneficiary of this pandemic event,” stated Kidder Mathews’ Executive Vice President Patricia Loveall right off the bat. “There will be no question about that.”

According to Matt McGregor, executive vice president at brokerage firm Colliers International, those within the commercial real estate industry were already expecting the beginning of the year to be slow. Both 2018 and 2019 were record years, with almost three times the normal volume on the industrial investment side. There was more than $1.5 billion in transactions in 2018 and 2019, when normal deal volume usually sits in the realm of about $560 million. December of 2019 saw $600 million—a year’s deal volume in a single month—in sales as investors sought to avoid the increase in excise taxes that went into effect on January 1st.

“You had a lot of deals from the first quarter jam into the fourth quarter, so predictably we were already going to be slow…and then COVID-19 happened,” explained McGregor. 

However, both Loveall and McGregor emphasized that fundamentals within the real estate sector were strong. There have been 93 deals since April 1st, and the sector is at $181 million in transactions since the beginning of the year—on par with normal but less than the two previous, blockbuster years.

“That ranks us nationally and is a good indication that the Puget Sound is weathering the COVID-19 storm pretty well,” McGregor added.

Two additional experts, James Lambert, senior managing director of industrial developments at Elion Partners and former head of real estate for Amazon Logistics, as well as Tom O’Keefe, CEO and principal of O’Keefe Development, believe that the industry will not just come back, but thrive post COVID-19 due to changes in consumer expectations when it comes to buying goods.

“I guess I’ll start off by saying that I’m one of those optimistic people who think we’re going to come roaring back in the third quarter,” said O’Keefe. 

O’Keefe echoed both Loveall and McGregor, stating that he had seen little fluctuation in market fundamentals over the past couple of months, despite less deal volume across the industrial sector.

Major deals are still happening, noted Loveall and McGregor, because large tenants simply have limited options and need to snap up space while it’s available. Even during the first quarter, of the 7 million square feet of space under construction, 32 percent was preleased, said Loveall. Rents and land prices are likely to hold steady in the future as well, in large part due to the sheer lack of available and developable land close-in to population centers.

And, added Lambert, beyond the pandemic, the future of industrial real estate in the United States will be logistics-related.

“The new world is going to look like logistics…Logistics is going to become the backbone of U.S. infrastructure,” said Lambert. “It is going to be how we get products to people in a time like we have right now. And people who have never ordered anything online in the past are now ordering online.”

“People are demanding their stuff, and demanding it now,” Lambert continued.

The four experts expect to see a number of big shifts in the industry in the years ahead. Among those shifts is companies’ decisions to move to near-shoring or on-shoring in an effort to maintain a steady supply of goods. While COVID-19 has disrupted supply chains for the immediate future, long-term, geopolitics and labor constraints in countries like China will prompt companies to look elsewhere for manufacturing space. For U.S. companies, Mexico is an appealing location to land due to an abundance of cheap labor and because if its proximity to the continental United States.

Additionally, the growth of industrial will likely continue to chip away at the retail center as more companies look to move their offerings online or our forced to adapt to an industry that is increasingly dominated by logistics.

“We already had a crisis within retail before COVID-19; there was already too much retail in the United States,” said Lambert, building off of McGregor’s metrics. 

As a result, the four experts are predicting almost a confluence of retail and industrial, a process that has already begun with major retailers such as Best Buy or Walmart offering same day pick-up or delivery for goods within their stores.

“[Retail owners] may be saved because of this transitional use and change of big box [sites] into last mile fulfillment centers,” said O’Keefe. “Best Buy today is running their brick and mortar stores today like fulfillment centers because they are carrying more inventory in those back rooms.”

These impacts will further prompt the growth of the Puget Sound as a logistics and industrial hub, so much so that in the future, companies who do want to establish a presence here will not only need multiple locations to be effective, but will need to get creative through searches for off-market deals and innovative facility construction.

“I think what people are realizing is that you cannot have just one distribution center in this market,” said Loveall. “It is too big. You just can’t do the next day or same day deliver and expect that you’re going to be in the valley or farther south and serve the north market, and vice versa.”