Industrial real estate sector soars due to COVID, e-commerce

The industrial real estate sector saw strong growth in leasing nationally and in the Twin Cities last year as the COVID-19 pandemic spurred e-commerce buying that intensified the need for more warehouses, distribution hubs and fulfillment centers, according to a new report from real estate services firm Jones Lang LaSalle (JLL).

Online shopping, home-improvement binges and delivery logistics beefed up demand for industrial properties — both rented and owned, according to JLL's U.S. Fourth Quarter Industrial Outlook report.

"The industrial market was remarkably buoyant with vacancy remaining fairly unchanged, given the turbulence in 2020. Disruptions caused by [coronavirus] lockdowns had minimal impacts on tenant move-ins this year, pushing net absorption to record level heights," said Mehtab Randhawa, JLL's director of U.S. Industrial Research.

U.S. industrial vacancy rates dipped to 5.4% from 5.6% a year ago across the entire industry, which encompasses 13.7 billion square feet of leased and owned industrial properties.

U.S. factory and warehouse leases in force during the fourth quarter grew 26.9% from a year ago, to 524 million square feet.

Leasing rates stayed strong across the industry and landlords avoided rent concessions that have become common in the retail and office sectors.

Although high demand was widespread across all industrial real estate in 2020, the rise in online shopping, deliveries and other e-commerce dominated industrial leasing in 2020, representing more than 16% of all the entire sector.

"A staggering 327.2 million square feet of new supply was added to the industrial market this year. With continued demand from e-commerce and 'logistics & distribution' users on the rise, the pipeline shows no signs of slowing down," the report said.

JLL Industrial Americas President Craig Meyer said the findings came as a surprise.

"In the beginning of March 2020, there was a high degree of uncertainty of how COVID-19 would impact industrial," Meyer said. "Originally, we anticipated a drop in demand by as much as 20%, but it soon became apparent that online shopping was going to be far larger than we anticipated. Overnight we saw online sales increase more than two-and-a-half times compared to 2019."

The industrial sector contrasted dramatically with retail, office, hotel and other markets. U.S. office vacancy rates rose from 12.9% to nearly 16%, according to recent data from the real estate services firm Cushman & Wakefield.

Vacancy across Twin Cities' 186-million-square-foot factory and warehouse market was 6% last year, compared with 4.8% in 2019. The increase was mostly due to the addition of newly constructed industrial spaces that had yet to be occupied, said Carolyn Bates, research director of JLL's Minneapolis office. New construction properties added more than 2.7 million square feet of industrial real estate to the Twin Cities marketplace in 2020. That is up from 2.1 million square feet in 2019, she said.

Included in the increase is Bayport-based Andersen Windows, which finished its 350,000-square-foot factory expansion in Cottage Grove late last year and Minneapolis-based Graco, which opened a 500,000-square-foot campus addition in Rogers. In November, Cirtec Medical announced it was expanding manufacturing in Brooklyn Park by leasing and rehabbing an existing building there.

Last fall, the Kindeva Drug Delivery firm that recently spun off from 3M started construction on a 139,000-square-foot factory and research lab in Woodbury. Lowe's opened a plumbing distribution business in Maple Grove. And a DataBank data center is opening in Brooklyn Park. They all show the strength of industry across the metro area, said Chris Hickok, who leads JLL's Industrial Market Division in Minnesota.

The Twin Cities industrial real estate sector was active in other ways, including a sharp increase in property purchases.

"The Minneapolis-St. Paul industrial market broke records in 2020, with more portfolio trades than any other year in history," Bates said, noting that the cities also saw a larger share of portfolio trades and institutional capital than ever before.

The local industrial real estate market saw $1.6 billion in total transaction volume last year. Standouts included Blackstone's record-breaking acquisition of CSM's portfolio in the third quarter, plus Prologis' acquisition of Liberty Property Trust in the second quarter, the report said.

Dee DePass • 612-673-7725