Industrial will evolve as the preferred CRE asset class

The sudden, real impact of COVID-19 can be seen in supply chain disruptions, lower consumer confidence and reduced consumer spending.

Trying to measure the macro picture, the scope and duration of the economic stoppage is not easy.

For those corporations who are currently sitting on surplus capital, waiting for the bargains to surface, it is still to early to assess how property values will be affected.

It is however, becoming clear which sector will emerge as strongest asset class.

Retail

There is no question that retail has been the hardest hit sector.

The impact on retail merchants and retail markets vary depending on whether the business is considered an essential service. 

Many pharmacies and food stores are thriving. Others such as restaurants, pubs and department stores may have been shuttered.

It will be some time before the affects of these variables can be measured to determine the impact on retail asset values

Office

There are two strong, varied opinions on the impact of COVID-19 on the office sector. 

Some believe a shift to home office work will take place as a result of this experiment of forced relocation for many of us.

There’s another valid argument that supports the theory that due to social distancing and employer/employee pursuit of healthy air and building systems, there will be an increase in demand for quality office space.

The flight to quality is likely to increase as the results of this pandemic take time to play out in the office market.

Industrial

I have reviewed the current rent relief requests from local, national and international sources. It’s interesting that the data from all three of these sources provide the same conclusion.  

That is, the percentage of rent relief requests from industrial tenants is far less than tenants from the retail and office sectors.

Our first quarter 2020 market reports are about to be released which will show that all three sectors have increased slightly in vacancy with retail rising to 5.18 per cent, office to 12.84 per cent and industrial to 5.74 per cent. 

By the end of the second or third quarters of this year, I forecast the industrial vacancy rate to drop below the retail vacancy rate. 

This would be the first time since we’ve been tracking this Saskatoon market data, that the industrial sector has emerged as the strongest asset class.

Global demand for new industrial space is expected to exceed three billion square feet over the next decade, according to our strategic partner JLL.

Industrial asset interest will only continue to rise.  We will see warehouse and distribution facilities grow to meet the e-commerce race to deliver good to its customers.

Multi-Family

Although it may be premature to speculate, I believe that quality assets within the multi-family sector will continue to draw demand.

It will be another month or so before we can properly assess the financial impact of high unemployment on this sector of commercial real estate.

We are hopeful that the massive federal and provincial government financial stimulus will bridge the gap to provide relief to those most affected by this crisis.

I welcome your thoughts…if you were to buy into Saskatchewan’s commercial real estate market today, what would be your preferred investment category?

Posted by Barry Stuart

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