Navigating the Challenges of 2020 in Leasing Industrial Space

COVID-19 has changed the landscape but activity remains brisk.

Interior space of a building at 4242 Bryn Mawr in Chicago, owned by a Brit Properties’ partnership.

It is commonly known that e-commerce is booming. So-called “last-mile” warehouses are leasing to tenants on a steady basis as consumers purchase more products online and less in traditional retail stores. Perhaps not as well known, last week the Institute for Supply Management reported that its manufacturing index increased by nearly 4% from the prior month. What do these two trends mean in terms of commercial real estate?

“Industrial real estate is the favored property investment sector these days,” says Eric Schneider, partner at Brit Properties, an industrial property firm based in Rosemont, Illinois.

“People need consumer goods at home–companies need space to manufacture and assemble many kinds of products, including food. The pandemic has not slowed down how much people eat and their in-home use of electronic equipment,” Schneider says.

Schneider adds, “manufacturing and distribution of all kinds of materials and finished products keeps trucks and freight by rail on the move. As a result, the local vacancy rate for industrial property in the O’Hare industrial market is still quite low, at about 6%.”

There is a problem, however. Companies are concerned that administrative staff and customer service personnel cannot occupy offices safely. Before COVID-19 companies packed employees into open office spaces consisting of numerous workstations, separated by movable panels. The previous rule of thumb was that a ratio of four employees could occupy 1,000 square feet of office space. Not anymore.

Today, office workers are at home. Offices are sparsely occupied or empty. In addition, meetings between industrial real estate brokers, tenants and buyers take place remotely by the likes of Zoom or Microsoft Meetings. This is likely to continue until the pandemic becomes less of a threat to our health.

One negative result of COVID-19, some companies have already discovered that industrial buildings with a high percentage of office space have become less desirable to companies looking to expand. Some companies are learning they can survive without as much expensive physical office spaces.

Dominic Carbonari, is an active industrial real estate broker and Executive Vice President with the Chicago office of JLL. He explains that the pandemic has changed the way he conducts his real estate business, “COVID is so contagious that I flat-out insist that everybody wears a mask on every property tour. It is very important to me and it’s not a big deal–it’s the new normal for now.”

Despite the current challenges, brokers say leasing activity has continued to be strong for industrial properties. In addition, with historically low interest rates, the demand from companies searching to buy warehouse and manufacturing buildings has been very strong as well.