From the Ashes of Office Rises the Phoenix of Distros, Life Labs, and More!
In March 2020, back when the world began to realize that this little virus out of Asia had gone global and was leaving bodies in its wake, global lockdowns began immediately and the stock market took one of its biggest plunges of all time. The world was in agreement: Things were only going to get worse from here on in.
But now, almost two years in, the world isn’t seeing the mass destruction and wealth evaporation predicted. Of course, the Covid-19 pandemic has been unbelievably cruel to some industries (restaurants, theatres and hotels come to mind) but for others, it has actually been a boon. After struggling for months with lockdowns, consumers realized two things: (Almost) Anything can be bought online and delivered to your door; and office space has much less to do with business productivity than previously thought.
These two realizations have caused some serious shifts in the commercial real estate industry; perhaps changes that were on their way eventually but Covid-19 certainly upped the timeline. The biggest impact is investors’ shift away from office space (values down 5.6% from pre-pandemic level) and other public gathering facilities such as shopping malls (worth less than 13% since the start of the pandemic) and hotels (values decreased 4.2% since pre-pandemic) and into better-performing investments. The irony is, investors needn’t look too far outside commercial real estate to find lucrative investments—the beating that traditional office space has taken is in direct contrast to the incredible growth of distribution centres, warehouses, and life labs—driven primarily by consumer behaviour changes driven by the pandemic.
Backstage Takes Centrestage in eCommerce
It was only a matter of time before online shopping overtook in-person as the preferred method for many goods, but most didn’t forecast this consumer change having a real impact until 2030 and beyond. The pandemic moved that timeline up from 10 years to right now, leaving many retailers struggling to build an online presence; those with eCommerce capabilities ready to go found themselves with another problem: stock shortages. Businesses relying on overseas suppliers were disappointed while those who had inventory close at hand—and close to their customers through industrial warehouses and distribution centres—saw their sales soar.
“The pandemic advanced us 10 years in the e-commerce model, so really we’re trying to respond to conditions that we were expecting to show up in 2030.”
- Bret Jordan, president of the northwest region for Ryan Companies.
Winning the Last Mile
In an era of lockdowns and on-demand everything, the retailer who can deliver the fastest is the retailer who gets the customer. Suddenly, the last mile and closely available inventory became the deciding competitive factor for retail businesses. Here are some incredible stats showing how quickly warehouses and distribution centres have become the darling of retailers and investors, alike:
The sector for warehousing and distribution centres increased in value by an incredible 41% over pre-Covid-19 levels (WSJ)
Despite value loss in traditional office space, institutional demand (pension funds, REITs, etc.) for commercial property is higher than ever as private equity real estate has fundraised a near-record $379.4 billion (WSJ)
Even smaller investors are excited, as Blackstone REIT raised $6.9 billion in the third quarter of 2021 alone; an incredible 87% more in one quarter than what the REIT earned in ALL of 2020 (WSJ)
In 2020, the 25 largest U.S. retailers acquired 18.8 million rentable square feet of industrial space; in 2021, those same retailers acquired 38 million rentable square feet—the largest such acquisition in over 10 years (WSJ)
The industrial sector grew 39% year-over-year, compared to 20% for the ENTIRE commercial sector in the same period (WSJ)
The amount of industrial space owned by the 25 largest retailers in the U.S. has grown more than fivefold in the past decade (WSJ)
More than half of U.S. industrial leasing is for under 100,000 square feet, typically the hallmark of distribution centres (WSJ)
Industrial vacancy rates hit a new low of 4.3%; as low as 2% in metro areas such as Los Angeles and New Jersey (WSJ)
Data centres and infrastructure that support and connect smartphones are being sought after with five of the top 10 REITs in the U.S. currently managing either data centres or mobile towers (The Economist)
Ten years ago, America’s biggest mall owner, Simon Property Group, was the most valuable REIT in America; today it is American Tower, owner of global phone masts (The Economist)
According to Costco’s Chief Financial Officer, Richard Galanti, owning the storage and distribution arm of the supply chain allows the retailer to both control costs and deliver better service.
Of course, eCommerce wasn’t the only winner to emerge from the pandemic’s ashes. Since 2010, an index on the Nasdaq exchange has quintupled in value and the number of companies included has more than doubled (The Economist). That industry is biotech.
“Owning and controlling it [storage and distribution facilities] yourself, we feel we can provide the best service and the best price to our members.”
- Richard Galanti, chief financial officer for Costco
Health is the New Wealth
While you’re most certainly familiar with the new celebrities of biotech—BioNTech, Moderna—biotech as an industry has been flourishing over the past decade, a rise that was only accelerated by the Covid-19 pandemic.
Property investors used to love parking their money in “safe” offices and retail buildings, until of course the pandemic showed us there’s no such thing as a “sure bet”, especially not in real estate. In the wake of falling office values, biotech has created the biggest buzz for investors including drug makers, medical-equipment manufacturers, and others. In fact, investment in biotech has increased $40 billion year-over-year from 2020 ($63 billion) to 2021 ($103 billion); a large proportion of which ($87 billion) is expected to flow into properties such as life labs. (The Economist)
Space for labs is in short supply as there are specific requirements that not all spaces can accommodate. In London, a property firm has suggested repurposing empty shops (an echo of the old bricks-and-mortar retail culture) as lab space to support emerging industries. There’s no shortage of investment dollars—in the past decade, biotech startups have seen the money raised from Initial Public Offerings (IPOs) rise exponentially from $4 billion to $64 billion, with venture capitalists adding another $27 billion in 2021 (a record), and as of August 2021, an additional $20 billion in 2021. (The Economist)
Interestingly enough, it remains to be seen if the life labs bet will pay off for investors. In 2020, only a little over 15% of biotech firms turned a profit; those that didn’t turn a profit lost a combined $33 billion. However, newcomer Moderna turned a profit for the first time in a decade in the second quarter of 2021. It remains to be seen how long Moderna and others in the biotech sphere can keep investors happy.
REFERENCES
Grant, Peter. “Commercial Real-Estate Sales and Values Surge to Records.” Wall Street Journal, October 27, 2021. https://www.wsj.com/articles/commercial-real-estate-sales-and-values-surge-to-records-11635249600.
Maurer, Mark. “Big Retailers Becoming Big Property Owners with Warehouse Deals.” Wall Street Journal, October 27, 2021. https://www.wsj.com/articles/big-retailers-becoming-big-property-owners-with-warehouse-deals-11635249601.
Parker, Will. “Pandemic Delivery Boom Fuels Demand for 'Last Mile' Space.” Wall Street Journal, December 1, 2021, sec. Commercial Real Estate. https://www.wsj.com/articles/pandemic-delivery-boom-fuels-demand-for-last-mile-space-11638277201.
Press, Economist. “Science and Technology Lifts the Gloom for Property Investors.” The Economist. November 13, 2021, November 13, 2021 edition, sec. Business. https://www.economist.com/business/2021/11/13/science-and-technology-lifts-the-gloom-for-property-investors.
Press, Economist. “American Biotechnology Is Booming.” The Economist, August 14, 2021. https://www.economist.com/business/american-biotechnology-is-booming/21803495.