CBRE Research found that 16 of the top 20 markets for under-construction space—accounting for 70% of total under-construction inventory nationally—have workers active and on site, with most of these projects deemed “essential.” Pennsylvania’s I-78/81 Corridor, Philadelphia, Central New Jersey and Oakland are the only markets that have shut down construction sites, although in New Jersey and Pennsylvania waivers can be granted if the construction is for buildings that will distribute essential product.
COVID-19 impacts have reduced leasing activity for the record 309 million sq. ft. of industrial space that was under construction at year-end 2019. Prior to the outbreak, there were minimal fears of vacancy rate increases because of robust demand for first-generation space. More than a third of this new construction was already committed by occupiers at year’s end. However, occupiers now are taking a wait-and-see approach or are unable to tour sites because of travel restrictions and social distancing policies.
Figure 1: Under-Construction Activity During Shelter In Place - Top 20 Markets (As of 4/10/20)
* In Pennsylvania, there are waivers that can be filed with the governor and granted in certain instances where the work or the client is in fact an essential need.
** Construction in the Bay Area has stopped. Job sites are closed.
*** New Jersey governor announced a 60-day pause in all non-essential construction.
Source: CBRE Research, Q1 2020.
While many construction sites remain open, there are challenges to the development process, particularly in securing the required inspections. Large cities have inspectors working while following social distancing protocols, but many suburban municipalities and unincorporated areas do not. This is forcing developers to hire third-party inspectors to complete required inspections. Securing permits for new construction projects is even more problematic and is delaying starts in many markets, since third parties typically are not authorized to issue permits.
Heightened safety requirements also are slowing the development process. There are different social distancing guidelines in place across the country, including the use of no more than four-person revolving teams, workers maintaining at least six feet of distance, taking temperatures of workers before they enter the site, provision of additional portable toilets (1 per every 10 workers,) on-site cleaning stations and sterilization of the site between shifts.
There also are delays in getting materials on site. While the cost of construction materials is dropping, time to get the products on site is increasing because of supply chain delays, although most construction materials can be sourced within the U.S.
New speculative development completions will have a marginal effect on the overall industrial vacancy rate in 2020. Moreover, many proposed speculative projects have been put on hold as debt markets are challenged by less available capital and uncertainty over how to appropriately price risk. This will create a lack of first-generation space coming to market for most of 2021 which will lower the overall vacancy rate back to pre-COVID levels in the latter part of 2021.
While challenges do remain, the fact that industrial construction is continuing at such a robust level showcases the overall strength of the sector.