A Midyear Take on the Industrial and Office Market

Don’t look now but 2020 is half over! Where the heck did the first six months go? Of course, no one even remembers most of the first quarter, but if you do, things were going great in January and February! In fact, many of us in commercial real estate didn’t see an end in sight! Then March arrived and we entered a whole new world. I can actually remember thinking “I might never do another deal this year!” Thankfully, I was wrong.
As reflected in the most recent SIOR Snapshot Sentiment Survey, the second quarter of 2020 has been an interesting ride in the office and industrial world. SIOR office brokers’ confidence trails that of their industrial counterparts, likely because there have been more answers than questions in the industrial sector, versus the opposite on the office side. Frankly, as of this writing, we won’t have definitive answers to many of the office questions for some time. Office occupiers are still trying to determine their next move, and in many cases, are still telling employees to stay home until they figure it all out. In fact, we are hearing more and more about companies not planning on determining “return to the office” dates until at least Labor Day. Unfortunately, this will delay any definitive revelations on the COVID-19 crisis’ long-term impact on the office market. So for now, we need to continue to contemplate: will we need more space due to social distancing, or less because everyone is still working from home?
By far, the industrial sector continues to be the most resilient area of commercial real estate. There has not been a single SIOR or non-SIOR webinar, podcast, Open Forum post etc. that has given any hint of a slowing of e-commerce and omnichannel related space consumption. Demand for large and small distribution centers, last-mile warehousing, cooler and freezer facilities, and reshoring and inventory stockpiling are all trending up. In fact, incredibly, there appears to be even more demand today than there was before the COVID-19 crisis began! Institutional quality rates in most markets continue to rise. In many cases, industrial vacancy rates are dropping or, at worst, remaining flat. Of course, we all know there is more to the industrial sector than e-commerce and there have been some specific areas of retraction in a number of markets that have been negatively impacted because of the unique industries in their region. Commercial aerospace, hospitality and tourism, gas, oil and automotive industries have all been hit hard. But overall, the industrial market remains very strong.
Fueled by robust industrial demand, the recent SIOR Snapshot Sentiment Survey showed a slight increase in overall commercial real estate confidence. We believe this uptick in confidence is partially due to SIOR’s member’s increased visibility into their client’s future, a clearer understanding of COVID-19’s affect on the economy, and a better understanding of how the crisis has impacted their own business, both short and long term. As noted in the survey, the progress of transactions (industrial and office) was comparable to historical norms. That said, office broker’s opinions of the coming six months remain negative and we believe this will continue until companies decide their next move.
The markets remain fluid, as does the news, which remains unpredictable. But the news cycle is beginning to slow, giving SIOR brokers more insight into the future. Forecasting the next two weeks used to be nearly impossible, but that’s no longer the case. Now, it’s reasonable to predict the next quarter or two. And those two quarters will be crucial as we begin to uncover the real effects of the crisis on small to medium sized companies and the commensurate effect on the office and industrial markets moving forward. One thing that hasn’t changed is that the best way to understand what’s next and how to make a sound investment in today’s market is to work with an SIOR.
Source: “A Midyear Take on the Industrial and Office Market”