The document discusses the rise of industrial real estate leading up to COVID-19 due to e-commerce growth and foreign capital inflows. It notes that while industrial has historically fared better than other sectors in recessions, the pandemic's impact on the global economy creates uncertainty. The near-term outlook is bearish due to overbuilding and high unemployment. However, long-term fundamentals for industrial remain strong due to expected increases in inventory and further growth of e-commerce.

1. AMAZON, AMBIVALENCE
AND THE FUTURE OF
INDUSTRIAL REAL ESTATE

2. TABLE OF
CONTENTS
▪ Introduction
▪ The rise of industrial real estate
▪ Foreign Capital
▪ Cap Rate Compression
▪ Speculative development
▪ Previous Recessions
▪ COVID-19
▪ Silver Linings
▪ Conclusion

3. INTRODUCTION
▪ As economic uncertainty associated
with COVID-19 continues to escalate,
transactional volume for commercial
real estate has screeched to a halt.
▪ Whilst the impact of social distancing
and nationwide lockdowns has become
increasingly apparent in an already
struggling retail real estate industry,
buyers and sellers of industrial real
estate are recalibrating their
expectations amidst an increasingly
volatile macroeconomic environment.

4. ▪ As the outlook for industrial real estate
remains in a state of relative flux, two
competing yet parallel narratives about
the future of the industrial real estate
industry have emerged.

5. ▪ Buyers, keenly aware of the fact that we
are entering into uncharted economic
territory, are readjusting their valuation
to account for the heightened economic
instability.

6. ▪ Sellers, motivated by maximizing the
value of their respective properties,
will insist on a rosier outlook for
industrial real estate.

7. ▪ Since the world rarely exists in bifurcated states
of black and white, slivers of truth can likely be
found in both the bullish and bearish outlooks for
the industry.
▪ The purpose of this presentation is to:
→ analyze the events that precipitated prior to
COVID-19,
→ understand the implications of said events on
the current state of the industrial real estate
market
→ make reasonable projections about the future
of the industrial real estate industry using both a
bullish and bearish lens.

8. ▪ Riding the wave of extraordinary
economic growth in the United States
and the blistering pace of e-commerce
expansion, industrial real estate
became an increasingly sought-after
asset class this past business cycle.

9. ▪ While much of the attention has been directed towards
the ascent of Amazon onto corporate America’s Mt.
Rushmore, the stodgy ‘steady eddies’ such as Best Buy
and Walmart have invested substantial amounts of
capital to enhance have enhanced their e-commerce
infrastructure and digital experience for their
customers.

10. ▪ Aside from investing tremendous
amounts of capital into improving their
online presence, both companies have
practically metamorphosized into
sophisticated omnichannel retailers that
are increasingly reliant on industrial real
estate to meet the demands of their
customers.

11. ▪ Keenly aware of the shifts in
consumer demand, pension
funds, and private equity
groups alike have invested
heavily in the asset class this
past cycle.
▪ These institutional players,
along with the REITs, find
tremendous solace in the
asset class given its
compelling fundamentals
and relative stability.

12. ▪ In addition to the increasing
presence of institutional capital in
this sector, the presence of foreign
investors cannot be understated
either.

13. FOREIGN INVESTORS
(CONTD)
▪ Frustrated by low and in some
cases negative interest rates,
foreign investors highlight the
desirability of American
commercial real estate market
in a yield-starved environment
given its stability and its strong
cash flow.

14. ▪ This foreign influx of capital combined with
the staggering amounts of capital already
invested in the market by domestic
institutional investors led to the
materialization of cap rate compression for
industrial real estate in several major
metropolitan areas.

15. CAP RATE COMPRESSION (CONTD)
▪ Cap rate compression across Tier 1 cities can be partially attributed to the lower
return of profile of foreign investors combined with the low (read: non-existent)
costs of capital for REITs and large institutions.
▪ As per CBRE, stabilized, Class-A industrial properties in prime markets such as
Orange County and San Francisco were trading at cap rates as low as 3.75% in
2019

16. CAP RATE
COMPRESSION (CONTD)
▪ Secondary and tertiary markets were
not spared either, as investors flocked
to these markets after being priced out
of Tier 1 metropolitan areas.
▪ Cleveland, a city that been
experiencing consistent population
decline for decades, had cap rates as
low as 6.25% for Class A industrial
properties and 7% for Class B
industrial real estate in 2019.

17. CAP RATE COMPRESSION
(CONTD)
▪ What was once a humdrum, sleepy
asset class in commercial real
estate had transformed into a
fiercely competitive market.

18. ▪ Developers looking to cash in on this
bonanza started speculatively building
newer facilities.
▪ Holding on tight to the mantra of ‘if you
built it, they will come’, developers
across the nation constructed several
million square feet of new product with
the hopes of being able to attract a big-
name tenant and convince them to sign
the dotted line to a long term, triple net
lease.

19. ▪ Atlanta metropolitan area
alone has well over 19,000,000
SF of industrial under
construction right now, 60% of
which is speculative in nature.

20. ▪ As Sam Zell so eloquently put it ‘the beverage
that everybody is excited about is
distribution…my guess is that it’s getting too
exciting and we’re building too much
industrial space.”

21. ▪ Although industrial real estate has
fared well in previous economic
downturns compared to its commercial
real estate counterparts, rents and
sales prices have experienced
declines in the past two recessions.

22. PREVIOUS RECESSIONS (CONTD)
▪Following the dotcom bust, rents for industrial space
experienced a slight decline at only 5%.
▪In contrast, the sales prices for industrial real estate
declined 25% following the dotcom crash.

23. PREVIOUS RECESSIONS
(CONTD)
▪ On the other hand, industrial rents
following the Great Recession slid 18%
from peak to trough while sales prices fell
35%.
▪ For many, the Great Recession was
commonly conceptualized as ‘the worst
case’ scenario for commercial real estate
in the United States.

24. ▪ However, given the severity
and global reach of the
current crisis, there is no
frame of reference for being
able to accurately forecast
COVID-19’s impact on the
economy, our way of life, and
the future commercial real
estate in the United States.
▪ The figures following the
Great Recession of 2008 may
indeed represent the best-
case scenario.

25. ▪ Before the outbreak of COVID-19, the
industrial real estate sector experienced
unprecedented average annual rent
growth as the demand for space
outstripped supply by a wide margin.
▪ Whether or not rents will continue to rise
at such a torrid pace is in question as
there are several factors that indicate a
slowdown.

26. COVID-19 (CONTD)
▪The COVID-19 pandemic along with the ongoing energy
crisis, travel restrictions, and skyrocketing unemployment
will all have a material impact on both the asking rents and
the sales prices for industrial property across several
markets.

27. ▪ The normalization of social distancing and
reduced density in public spaces is already
impacting low-margin businesses that are
predicated on volume – i.e. hotels, bars, theme
parks, bars.
▪ As a result of international travel restrictions,
metropolitan regions with large tourism
sectors, such as Las Vegas and Orlando, have
transformed from bustling cities into ghost
towns.

28. ▪ The lack of air travel, along with the
widespread adoption of remote work has
contributed to a 30% reduction in global oil
demand and the near collapse of the oil and
gas industry.
▪ Houston, the energy capital of the world, will
likely experience increased vacancies due to
oversupply across several submarkets and
reduced demand for industrial space in the
wake of the most recent energy crisis.

29. ▪ Port cities will not be immune to this
downturn either.

30. COVID-19 (CONTD)
▪ One of the leading logistics indicators in the United States is inbound port traffic.
▪ Declining cargo traffic in the wake of COVID-19 and the ongoing US-China trade
tension, will likely impact the demand for industrial space across several West
Coast markets including San Francisco, Los Angeles, and Seattle.
▪ These constrained markets, however, are likely to fare better than their inland
counterparts due to their high barriers to entry

31. ▪ Although the prospects of a bleak
economy, staggering job losses, and
oversupply in several major markets
support a bearish outlook for commercial
real estate, there are several cues in the
news to suggest that industrial real estate
will emerge from this crisis as a long-
term favorite in the commercial real
estate space.

32. ▪ The shift from ‘Just-in-Time’ to ‘Just-
In-Case’ inventory strategies, the
closing down of several of brick-and-
mortar stores, and insatiable
demand of basic consumer goods
(read: toilet paper) has not only
disrupted global supply chains but
will also likely lead to an increase for
warehouse space to house excess
inventory.

33. ▪ As coronavirus protocols restrict people to the
confines of their homes, consumers across the nation
are increasingly dependent on e-commerce for more
than just discretionary purchases.
▪ Although e-commerce currently represents a mere 3%
of US grocery sales, the market for online groceries
will expand significantly over the coming decade
according to CBRE.

34. ▪ Walmart Inc alone generated nearly $900
million in online grocery sales in March
2020.
▪ 62.6% of consumers said that they
purchased groceries from Amazon in the
past 12 months

35. ▪ Industrial giant, Prologis, anticipates that
e-commerce growth will boost demand in
the long run as there is now a wider
range of consumers shopping online for
an even wider range of products –
including both food and medicine.

36. SILVER LININGS
(CONTD)
▪ Average website traffic for e-
commerce websites has on average
increased 115% over last year, with
daily platform traffic consistently
eclipsing the previous record set on
Black Friday in 2019.

37. ▪ While the short-term outlook for the US economy
and commercial real estate industry continues to
deteriorate significantly, industrial real estate is
poised to rise from of the ashes of this pandemic-
induced recession faster than its commercial real
estate counterparts (retail, multifamily, office),
and may emerge as the premier asset class for
savvy investors.

38. ▪ Shifts in consumer behavior and the growing market
for purchasing durable goods online will drive
demand for fulfillment centers, warehouses, and cold
storage facilities across the United States.
▪ Increased inventory holdings for durable goods may
also drive demand for warehouses as retailers look to
loosen ‘lean’ inventory strategies.

39. ▪ Whilst the long-term
fundamentals remain
strong, short term
uncertainty brought about
by the current
recessionary environment
will likely lead to an
adjustment of both rental
rates and sales prices for
industrial real estate.

40. CONCLUSION (CONTD)
▪ Secondary markets will see greater corrections in valuations as a result of
overbuilding and speculative development.
▪ Despite the short-term hiccup in valuations, well-built industrial property located
in secondary markets characterized by pro-business leadership, temperate
climate, and affordable housing will prosper as the Southernization of the US
population continues.

41. ▪ For some investors, secondary markets
with significant overbuilding may be an
attractive starting point in this
environment.
▪ On the other hand, investors looking for
‘fire sale’ deals may be better served by
directing their attention towards
hospitality and retail real estate sectors –
the real victims of the COVID-19
outbreak.