Analysis: Because of COVID-19 it is a smart decision to buy an industrial unit now

The way I work, I like my clients to make an informed decision when it comes to buying and investing in industrial real estate. This analysis shows that if you are thinking about purchasing an Industrial units, do it as soon as possible (especially because of COVID-19).

There are three main forces pushing up the prices of industrial real estate faster than it has been increasing in the past five years. These forces are driven by COVID-19. The first is the increase of ecommerce by consumers, increasing the demand for warehouses that make up ecommerce’s supply chain. The second is that companies and government will hold into a higher stock level of inventory, increases the need of warehouses. The third is that and countries are bringing back their supply chains from abroad, a process called re-shoreing. 

The price of industrial units is skyrocketing in the GTA

In the past five years, the prices for industrial units in the GTA have increased on average by 15.1% per year. There is a historic lack of industrial units for sale and lease in the GTA with reports showing vacancy rates as low as 1.4%. This is forcing buyers to bid aggressively, pushing prices up. And the market conditions show that because of ecommerce (see below) the trend will continue into 2020, and beyond.  

Conclusion: Therefore, buy now, lock in the price of industrial, and you will be profiting handsomely year on year.

Ecommerce: COVID-19 will increase industrial prices

The biggest factor that increased prices of industrial units was the rise of ecommerce.  This has increased the demand for industrial units in all major cities around the world, including the GTA. 

Covid-19 is forcing people to shop online, accelerating the trend already in place. Brick-and-mortar shops are closing down and are being replaced by ecommerce services. These businesses require industrial units close to urban cities for storage and delivery.

Consider the opinions of industry experts quoted in this Bloomberg article: “With so many of us staying home, it’s no surprise to see a surge in packages showing up on our doorsteps. Indeed, online shopping is on the rise, and COVID-19 may prove to be the tipping point so many industry watchers were waiting for.

“I’d be very surprised if e-commerce share isn’t over 20 per cent in the second quarter,” former eBay Inc. chief executive officer Devin Wenig told BNN Bloomberg in an interview on Thursday. “That’s a remarkable acceleration.””

Conclusion: Therefore, buy now and you will have an asset that can be easily liquidated at a profit, should you need the cash.

Leases for Industrial units are skyrocketing, too

The prices of leasing an industrial unit has increased by 14.6% year on year in the past five years. This has happened for the exact same reasons as above. If you are an investor, you will profit by the increases of rent prices, while having an appreciating asset that can be easily liquidated.

Conclusion: If you are an end user, buying
1) Protects you from the price hikes in rent
2) Pays down the mortgage,
3) Have an asset that is appreciating. 

Overall, I hope this has given you context as to why I am advising all my clients (my friends and family too) to invest in industrial real estate NOW.

(All figures quoted in this articles are from the Toronto Real Estate Board for industrial units under 5000 sqft. The pattern is similar for larger industrial units too, as well in all areas of the GTA)

Further Reading

Increasing demand for ecommerce will fuel the need for warehouses at a pace much higher than in the current cycle.

E-Commerce: COVID-19 and its associated quarantines are creating new online consumers, which will further increase e-commerce’s share of total retail sales. As it has been for more than a decade, e-commerce will once again be the biggest catalyst for both demand and change in industrial real estate over the next cycle. Increasing demand for goods bought online, especially food, will fuel the need for distribution facilities at a pace much higher than in the current cycle. Read full analysis here.

COVID-19 Forces Food Industry Shifts As Surge in Online Ecommerce Increases Demand For Industrial Units

CBRE Research explored the relationship between e-commerce grocery growth and cold storage warehouse capacity in its Food on Demand Series: Cold Storage Logistics Unpacked report, concluding that an additional 75 million to 100 million sq. ft. of freezer/cooler space will be needed to meet demand for D2C food delivery and BOPIS.³ The COVID-19 pandemic is accelerating this trend. Read full analysis here.

Industrial market surges despite COVID-19

Metro Vancouver’s industrial real estate is surging during the COVID-19 pandemic, led by distribution demand and a wholesale search for space to store new cars, trucks and tonnes of retail material piling up on docks and railcards.

E-commerce – linked to stay-at-home consumers shopping online for home delivery during the pandemic – surged 100 per cent in the U.S. during between March 13 and March 15 compared to March to March 11, MacCauley noted, and he suspects a similar trend was seen in Canada. Read full analysis here.

Canada’s supply chain to increase demand on industrial real estate

Over the long term, Canadian supply chains are expected to increase due to the combined effects of: 1- acceleration of ecommerce penetration, 2- increases in on-site inventory levels for JIT inventory management, and 3- on/nearshoring of supply chains to improve resilience. Read full analysis here.

Supply chain risk mitigation and resilience may result in re-shoring and high inventory cover

The [Covid] outbreak is likely to elevate the issue of supply chain risk mitigation and resilience – concerns that had come to the forefront amid heightened trade tensions. The business-level response can be varied, with two notable alternatives pursued:

• A re-shoring or near sourcing of manufacturing and an increase in diversification in terms of sourcing. This could result in additional regional demand for industrial facilities and associated logistics, but also potentially lead to reduced container flows at major gateway ports and lower warehouse demand in these locations. Technology will be key to securing greater supply chain visibility to achieve this.

• A reversal of an existing lean supply chain with low inventory cover. Firms may decide to increase their inventory levels in the long term given the uncertainty and disruption, and this may have a positive flowthrough effect to demand for warehousing space. The business case is strongest for high-value and high-turnover goods. Read full analysis here.