RCM-SIOR Investor Sentiment Survey Shows U.S. Industrial Outlook Remains Positive for 2020

Industrial investors such as Plymouth Industrial REIT are focusing on Class B properties in secondary markets. Earlier this year, the Boston-based firm acquired 5531-5555 Phantom Drive, a 129,000-square-foot building in Hazelwood, a suburb of St. Louis.

CARLSBAD, CALIF. — U.S. industrial investment is expected to continue at a steady pace into 2020, although headwinds created by tariffs and a slowing economy are beginning to strengthen, according to the third annual Industrial Investor Sentiment Report from Real Capital Markets (RCM) and the Society of Industrial and Office Realtors (SIOR).

Investors are shifting strategies, however, to find safe havens against any market slowdown. Some investors are adjusting their portfolios toward land-constrained markets that provide the potential for higher rent growth. Among those strong markets are Seattle, Miami, Northern New Jersey and parts of Southern California. Other investors are moving back to core markets to minimize risk or are focusing on secondary markets where further cap rate compression is more likely, according to the report.

“Investors are projecting a steady flow of industrial activity in the United States for the foreseeable future, given the strong fundamentals and the stability this sector offers,” says Steve Shanahan, executive managing director of Carlsbad, Calif.-based RCM, a part of LightBox. “Investors are keenly aware of the potential for an economic slowdown but are focused on the long-term horizon and taking the steps necessary to protect their investments.”

The RCM-SIOR report includes insights and perspectives from industrial market experts — approximately 400 investors, developers and brokers — across the country. It was based on surveys and interviews that tracked participants’ perceptions of investment activity, pricing, perceived threats and opportunities and cap rates. The report shows that industry experts are thinking more strategically about their investments and decisions but are not pulling back from the industrial sector.

“We definitely find ourselves at a very interesting point,” says outgoing SIOR President Robert Thornburgh, a regional president for Kidder Matthews in El Segundo, Calif. “Further down the road, the corresponding rise in values, construction, labor and talks of a recession — while not new topics — could clearly develop into sizeable headwinds.”

E-commerce growth is key sustaining factor for the industrial sector

E-commerce continues to reign as the top growth factor for the industrial sector, as noted by 44 percent of survey respondents. While there is considerable activity from more traditional manufacturing, packaging and related tenants, the buzz that e-commerce creates is difficult to overlook.

“The significant expansion in e-commerce and the ongoing need for realignment of the corporate supply chain continues to shape the industrial sector and helps position it as a top asset class for investors, now and moving forward,” says Tina Lichens, COO of RCM. “There is also a significant push to tap into consumers in large, urban population pools, which is driving considerable warehouse and distribution activity.”

Jojo Yap, chief investment officer of First Industrial, admits to “not knowing when the music will stop” or being able to predict the magnitude of the impact e-commerce is having on industrial real estate.

Construction still active and driving investment pipeline

The U.S. industrial market has experienced significant construction during the past five to seven years, as developers look to fill demand from tenants seeking modern space. Markets such as California’s Inland Empire, along with Dallas, Chicago and others have seen millions of square feet of new buildings hit the market, with steady leasing following suit.

While development has been tempered by a balanced lending environment, there are some markets where overbuilding is a perceived concern. In this year’s report, 51 percent of the survey respondents noted being somewhat concerned about overbuilding, compared with 33 percent saying they were not concerned at all. Some report respondents noted the continued need for new development in some markets, however, given the low vacancy rates and strong tenant demand.

Economic and non-economic concerns posing threats

The report also notes that brokers and investors are concerned about the ongoing disruption from tariffs and escalating trade wars, which they say cause volatility and increased costs. Closer to home, experts say the ongoing labor shortage — both for workers in general and for those with specific manufacturing, computer and related skills — is having ripple effects throughout the U.S.

According to the report, the greatest non-economic threat to the industrial market is equally balanced between lack of supply of quality assets and unrealistic seller expectations and, to a lesser degree, overbuilding or oversupply. Given the volume of product that has traded over the last several years, investors have been consistent in the RCM-SIOR survey in citing lack of supply as a concern.

Markets to watch in 2020

Heading toward 2020, many investors surveyed and interviewed for this report said that industrial activity will continue to be strong in core markets, such as the Inland Empire, Dallas, Chicago and Northern New Jersey. Coastal markets, particularly those that tie into port activity such as Los Angeles and Miami, are also expected to perform well due to the limited potential for further development.

Also, markets with a strong business climate, a growing population base and solid logistics infrastructure are on the radar of investors. States with reasonable regulatory oversight and legislation, such as Arizona, Nevada, Texas, Florida and Tennessee, also are viewed favorably.

Pendleton White, president and chief investment officer of Boston-based Plymouth Industrial REIT says, “We believe, and have for some time, that the risk-adjusted return metrics for Class B properties in secondary markets are better than Class A properties in primary markets.”

While nearly 32 percent of survey participants expect cap rates to compress further over the next 12 to 18 months, White notes that there hasn’t been as much cap rate compression in secondary markets. He says there is still plenty of opportunity to acquire fully leased assets at 7.5 to 8.5 percent cap rates with annual rental rate growth of between 5 and 7 percent.

In summing up the global influence of e-commerce and need to evaluate each market’s characteristics, incoming SIOR Global President Mark Duclos, president of Sentry Commercial, says “e-commerce has brought a globalized focus to this sector, and may be a constant thread across the country, but the majority of markets also are driven by the local market users’ needs and economic considerations.”

To read the 2019 RCM-SIOR Industrial Investor Sentiment Report in full, click here.

— Kristin Hiller

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