March 27, 2020
At an extraordinary time when online demand for household staples has Amazon’s fulfillment centers so busy that the company has temporarily limited shipments of nonessential items to its facilities, two warehouse landlords have gotten a corner on the market. They’re Prologis, which is all about building, buying and operating distribution centers, and the Blackstone Group, which acquired $25 billion of these properties in 2019.
Between them, Blackstone and Prologis control approximately one billion square feet of U.S. warehouse space. That’s more than their 10 largest competitors combined, according to CBRE.
“There’s no doubt that growing e-commerce sales is a secular tailwind that will persist no matter the economic environment, especially now that it’s impossible to buy something in a physical store,” Green Street Advisors’ Eric Frankel told Bloomberg News. “That’s the main bullish thesis of why industrial is going to be OK.”
However, although Bloomberg quoted CBRE’s James Breeze as saying that industrial is “still essentially the safest commercial property type to invest in,” it reported that investment in the sector isn’t quite the slam-dunk it was even a few months ago, before the coronavirus became a global pandemic.
Investors have been drawn to industrial’s fundamentals for quite some time, and have paid accordingly, thanks in part to the limited supply of last-mile delivery space. The sub-5% vacancies in many markets have enabled warehouse owners to pass along regular rent increases to tenants, helping to boost values of industrial properties by 34% over the past three years, according to Green Street.
However, even with robust demand from Amazon and its competitors, those valuations are now in question, Bloomberg reported. Since the need for warehouses closely tracks economic activity, a worldwide slowdown will remove some, if not all, of landlords’ pricing power. Looking back to the 2008 downturn, Bloomberg pointed out that NOI for industrial properties dipped during that period.
And although it may not always seem to be the case, e-commerce in fact represents only a fraction of warehouse demand. Much of the space is used by industries that are going to struggle through the seemingly inevitable downturn, from auto manufacturing to the oil and gas sector. Although the need for space will probably hold up better than in the 2008-2009 recession, Frankel said, “there are things you just don’t think about that are going to be impacted.”
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