Elon Musk, the founder of PayPal, Tesla, SpaceX, the Boring Company, and Open AI, has always thought most people think in analogies instead of understanding the universal truth about the world around us. This is why we feel comfortable sending payments over the internet, able to reuse rockets for multiple launches, have an electric car that can go zero to 60MPH in 2.9 seconds, and are on our way from making batteries at $600/kwh to under $100/kwh.

Considering we are entering into an unprecedented time in the world economy currently, using analogies may leave a misunderstanding of the market around us.  That’s why this post will go over the facts about the commercial real estate industry and ask the questions of how this new data will affect supply & demand. There are some universal truths about commercial real estate and how this market shift has affected, or could soon affect, pricing, income, development, and vacancy in the upcoming months and years.  Please understand that there are millions of factors that may change the industry.  Government policies, not only in the United States, but around the world, have effects on what the COVID-19 impact to the health of the population may be,  and the ability for an economy to run. So, for the investors who don’t like risk, there will never be a time for you to invest and, given that, right now is certainly not that time either.  To the rest of us who know, historically, what goes up must come down, and what goes down will eventually come up again, we will bring the questions and the data that will help make better informed decisions, by helping you think about it.

What are the ripple effects of the pandemic? How far reaching will these effects be and how long lasting? Where is the industrial market going to go from here?  What are the short term vs long term effects?  Let’s think about the ramifications of what we have seen from March through May.

Let’s talk about the aerospace industry first and the effects of the almost complete shutdown of air travel, throughout the world. Runways are lined with jets that are sitting idle, the airlines scrambling to try to manage through the many problems created by the planes’ lack of activity.  Like any machine, sitting idle is not the best thing for an airplane.  As they juggle the planes themselves and try to rotate through them, the results downline are devastating. Boeing laid off thousands of workers, all of the other manufacturers across the world did the same.  Think about the suppliers downline that all of a sudden have no place to send their product, and without sales have to stop making their product, which in turn means they are not purchasing raw materials to make their product.  Where will that leave us ?  How many companies will have to restructure their business and the amount of space they occupy?

Let’s turn to the geopolitical effects and the new calls for, in effect, a “bring it home” mentality sweeping through the manufacturing of all of the medical related supplies. From PPE to ventilators to raw materials to manufacturing the drugs to combat the COVID-19 or other future pandemics, political forces in the nation’s capital are pushing to bring all of it home amidst accusations of Chinese theft of intellectual property, cornering markets and pre-stocking potentially needed supplies of medical materials and PPE in order to greatly profit, restricting the US manufacturers from fair competition within China and restricting fair trade.  What effect will that have on an industrial real estate market that was already seeing low single digit vacancy rates, and escalating pricing for space?  Will there be enough space in the market to bring some of this manufacturing home to the U.S.?  Will there be enough workers to fulfill the need for those high skill jobs after everyone is back to work? How long will it take? Will it spur the need for new construction after a long period in which it was not economically viable to do so? 

Then, let’s talk about the totally changed landscape in logistics. Amazon is now filling many of the older abandoned big box stores with local fulfillment centers. FedEx and UPS are at max capacity in most of their centers. Will the habits started in the pandemic continue unabated in the post pandemic period? Will the warehousing and distribution industry see further gains beyond the phenomenal growth over the last five years?  What will that look like? At what level will it finally settle out? Will there be distribution centers in every city and town? Will the new Amazon fleet of delivery trucks be replaced by drones? 

“Will I ever have to go back to the office?”  Is this a question that many employees now have. We can’t imagine it would have come as quickly as it did. Most offices across the country are either semi-closed, or operating at 50% capacity. While many of us would say we are ‘zoomed out’, the technology revolution has helped many companies continue to run without any employees in the office avoiding major issues.  While studies in the past have shown over time that employees are less productive working from home, the flexibility, potential cost savings, and more hours of working hours not encumbered by travel may cause employers to rethink how business has been done.  Two possible factors moving forward that will have an effect on office will be how much space does each employee need in order to be safe and how many people can be in a single office to ensure no rampant spread of viruses in the future. Are the days of the big bullpen now past? Will smaller private offices be brought back for safety? 

Retail may be the industry that sees its pain stick around the longest.  When one thinks of retail, you might think of a mall or downtown shops. The growth of online sales may have had many retailers thinking that they were going to have to adjust their businesses model, as buying products wholesale and reselling them to customers who come into their store was slowly moving away.  Because of the cost effective way of transporting goods to an individuals home, commodities have already seen a huge disruption.  Most consumers were already in the stage of being ok not looking at or touching products in order to them.  We are likely in the latter stage where everyone is much more comfortable buying products online and having them delivered to their house. Certain large and small retailers have already declared bankruptcy, and this is before their rents have been due or payroll has come out of their own pocket and not subsidized by the PPP program. It’s been said before and likely will be said again, shopping downtown may no longer be a thing, but service and entertainment might be the new reason that you want to live within walking distance to the center of a city.  

Let’s talk about the hospitality industry.  This industry’s complete shutdown has likely taken the biggest hit of any sector, with very little attention to address these issues. Government mandate’s restricting travel, larger gatherings, conventions, and just plain travel for fun, (think theme parks, Las Vegas, Casinos etc.,)  shut down everything and turned reservations to 0% in March through May.  This number is still under 20% as conferences, sporting events, and most cities still have many restrictions on gatherings and opening larger venues. Also, the self quarantining mandates of 14 days in many states really make short travel a non-starter. There has not been much trading in these types of properties as of this point,  but once they start it will most likely be out of necessity, and that may mean the largest drop in prices of anything in all of these classes of real estate! 

Hold on to your hats, we are in for interesting times in the next year or so!

– Written by Dave Garvey & Ethan Ash