Although there are some rising uncertainties, the industrial sector appears to be weathering the current crisis caused by the coronavirus outbreak better than other industries. Despite nationwide shutdowns of construction sites, warehouse developments were deemed essential in most states. In 16 of the current top 20 markets for industrial space construction, workers are actively building, according to CBRE.
Commercial Property Executive reached out to industrial developer Bridge Development Partners for a close-up on the industrial market. Jeff Milanaik, Northeast region partner, unveiled how the sector is impacted and what is behind the sector’s strength during this global health crisis.
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Bridge Development Partners operates in core markets such as New York/New Jersey, California, Washington, Illinois and Florida. How has the coronavirus outbreak impacted the industrial sectors in these core U.S. markets?
Milanaik: As a member of NAIOP’s national executive board, I have been receiving regular insights on how many of our peers across the country are handling this crisis. Through my interactions with many of them, it’s fairly clear that no one has really seen any impact at this point. Instead, what we’re wrestling with is everyone’s anticipation of what’s actually going to happen.
I’m extremely bullish on industrial coming out of this crisis stronger than ever. America was shocked to learn how vulnerable our population and our supply chains are. We’ve never heard the supply chain mentioned as much on national news as we have during this pandemic. I anticipate a paradigm shift in how the supply change operates. Ultimately, I believe we need more onshoring of goods and increased inventory of supplies on hand here in the U.S. That inherently bodes well for warehousing.
Our vacancies were already at historical lows prior to COVID-19, and it will be even tighter, particularly in the Northeast. In this region, most buildings that are upwards of 300,000 square feet are owned by disciplined investors who have been through this kind of situation before. But smaller buildings of only 50,000 square feet generally have smaller ownership. Anyone’s best guess is that we won’t reopen until at least June 1—that’s a long time for smaller companies to lack revenue if they don’t have an online presence. There will likely be vacancy increases in those submarkets/asset classes throughout the tri-state Area, but nothing as bad as in any of the prior recessions.
What immediate effects did the coronavirus outbreak have on your operations and portfolio?
Milanaik: It immediately impacted how we manage and continue construction in our New Jersey and New York markets—particularly when the New Jersey executive order came down to stop all construction. That sent ripples through the industry. Everyone was working hard to convince the governor’s office to make exceptions for business related to e-commerce. They had to be practical about it—people in New Jersey need warehouses that can serve essential businesses. People from both the commercial real estate industry and the labor unions were lobbying hard to keep people employed.
Of the 15 significant projects going on in New Jersey, only four are currently still shut down, and it really comes down to municipalities. A good example is Phillipsburg, N.J., where we have signed Uniqlo and Mark Anthony Brewing at our Bridge Point 78 project. Mark Anthony Brewing produces and distributes alcoholic beverages to liquor stores throughout the state—which have been deemed essential businesses—so that construction is allowed to continue.
It was also incredibly important for us to adapt to the new rules, regulations and governance around continuing construction right now. We’re moving forward and following all protocols, such as social distancing, taking every worker’s temperature before they step on-site and providing masks and sanitizing stations.
Bridge Development Partners is responsible for the 18-acre Sunset Industrial Park project in Brooklyn. New York is one of the epicenters of the outbreak and most construction sites have been shut down. How is this warehouse project being affected by the pandemic? How are you coping with the challenges?
Milanaik: Bridge found ourselves in a unique position. Our business model consists of developing on a speculative basis, holding some properties, while also looking for opportunities to sell to institutions. When evaluating our position at the beginning of the crisis, we found ourselves with properties under contract to be sold and very little exposure to development risk.
It wasn’t unexpected that our Sunset Park project would be shut down by Gov. Andrew Cuomo’s executive order. Fortunately, New York City has a waiver process in place where we are able to keep certain activities underway. Because of the complexity of this project, we are now having conversations with existing tenants whose leases are going to be expiring soon, to make sure everything is resolved before demolition and construction can begin. We were also working very intently on the overall design, making adjustments for current tenants that have decided to stay, etc. We’re finalizing those plans now and soon we’ll be applying for building permits, so the process is actually still lining up with the schedule we had put together.
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The need for industrial space was already underscored by e-commerce growth. The coronavirus outbreak prompted nationwide lockdowns, further encouraging online shopping and increasing the demand for warehouses. How do you see this trend continuing after the pandemic?
Milanaik: E-commerce growth will double sooner than anyone anticipated. People that have never shopped online before are doing it now—they are becoming more educated out of necessity. Growth is also being accelerated for those who were already using it. It’s opening up this whole new customer base and there’s no reason for them to stop using it when the pandemic is over. That’s not to say that retail is dead—it isn’t. People are social animals and they’ll still need that interaction of physically shopping for goods, so retail stores that specialize in experiential shopping will survive. But online shopping is being demystified for many consumers, and it will continue to grow faster than ever.
Which markets will benefit the most from the pandemic-driven demand?
Milanaik: This is a national experience and I believe that e-commerce will be nationally recognized. One thing I don’t know is how areas of the country that are not as impacted as we are in the New York/New Jersey markets will benefit from the demand, or how they’ll fare. It may ultimately be smaller in those areas, but regardless, markets across the country will all see some benefit.
Bridge Development Partners’ portfolio also includes cold storage. How is this asset type impacted by the outbreak?
Milanaik: As a company, almost every day we have conversations centered around the food supply chain and the increased demand for foods—frozen or otherwise—that the outbreak has launched, so we’re bullish on cold storage as well. It’s traditionally an underserved market, and we formed a partnership with PGIM on a cold storage venture long before the pandemic struck. We are ready to move forward on freezer/cooler buildings, we’re already working on a few scenarios in the Northeast. There’s definitely a pent-up demand for these assets.
How has the pandemic changed the nature of the logistics system and how is it affecting supply chain expansion?
Milanaik: The pandemic has shown us vulnerabilities in the supply chain and our whole food supply. If you look at meat production companies in the Midwest, we’ve started to see these factories being shut down as factory employees contracted the virus, and that has an immediate impact on our food supply. This is the mainstay of our sustenance, and it’s worrisome. Nothing dramatic has happened, but it’s a key example of vulnerability, and it’s happening with multiple product lines, like technology and home goods, where delivery is now taking three weeks.
On the positive side, the awareness of these weaknesses and having to focus on solving these supply chain issues will pull us farther away from just-in-time inventory and delivery. We’ll survive these dips because companies can see the problems clearly and are actively working to improve supply chain operations.
What permanent changes do you expect to see in the industrial sector in a post-pandemic world?
Milanaik: The industrial sector will shift more towards onshoring and continued, strengthened demand for receiving goods. There will be short-term blips, but the demand for improving supply chains will compensate. In the Northeast, we’re land-constrained, so we’ve been meeting demand with infill markets. The need for goods will increase and the industrial sector will continue to compensate for that.