Real Capital Markets, SIOR: ‘Plenty of Runway Left’ for Industrial Sector

by Kristin Harlow

CARLSBAD, CALIF. — Institutional, private and foreign investors all continue to pour capital into the industrial sector in the Midwest and nationwide, confirming there is still “plenty of runway left,” according to the 2018 Industrial Investor Sentiment Report from Real Capital Markets (RCM) and SIOR. The steady flow of capital and positive momentum within the sector comes despite looming threats from rising interest rates, tariffs and a diminishing supply of quality assets.

“The industrial market and those who invest in it have enjoyed an incredible, long run because of its ability to adapt to the needs of specific users and subsectors, and embrace the ongoing evolution of the global economy,” says Tina Lichens, COO of Carlsbad, Calif.-based RCM. “Given this performance and consistency, we have every reason to believe there is plenty of runway left.”

RCM and SIOR compiled the study through a survey of RCM principals, SIOR members and subsequent interviews with key industry leaders.

Year-over-year comparisons

Questions in the survey tracked participants’ perceptions of investment activity, pricing and cap rates. Notably, more than 48 percent of respondents believe that industrial activity will remain at or about the current level. One year ago, that figure was 43 percent.

More than 38 percent of this year’s respondents anticipate pricing increases of 5 percent or more compared with 34 percent in 2017.

This year, 44 percent of those surveyed believe cap rates could go higher, and 18 percent now see the potential for further compression. These figures are up from 35 percent and 17 percent last year.

E-commerce, economy growth boost sector

Sustained growth in e-commerce and the general state of the economy have boosted the industrial sector over the last two years, as consistently noted by 71 percent of participants surveyed for the report. Some market projections show e-commerce growing at a rate that translates to demand for approximately 180 million square feet of logistics space by 2020.

“Demand is being driven by e-commerce and related uses,” says Don Schoenheider, a senior vice president with Hillwood Investment Properties in Chicago. “There is a lot of runway left in that part of the equation.”

Geoffrey Kasselman, executive managing director with Newmark Knight Frank in Chicago, says that while certain markets offer proven locations by which to achieve local, regional and national e-commerce fulfillment (Columbus and Indianapolis, for example), every metro area with 500,000 residents or more is enjoying some e-commerce related activity. This could even trickle down to metro areas of 100,000 to 200,000 residents.

Last mile is first for emerging and expanding opportunities

Market experts view last-mile and infill development product as the most prominent, highly sought after opportunities, as users want to be as close as they can to population centers. Accordingly, an overwhelming majority of respondents (52 percent) confirmed their bullishness on last-mile and infill development opportunities.

“Users want to get as close as they can to population centers in order to fulfill same-day and next-day orders,” says Schoenheider, while also noting that these last-mile opportunities are among the most expensive.

Last-mile properties are particularly important for the burgeoning grocery and food delivery needs. Following Amazon’s acquisition of Whole Foods last year, numerous other retailers, such as Walmart and Kroger also offer delivery services requiring last-mile facilities to fulfill same-day and next-day orders. The challenge is finding sites that are suitable for today’s needs such as parking, truck traffic and dock use.

Threat of tariffs

The industrial sector has experienced a record level of activity over the past several years, as investors moved into the sector in search of stable, long-term returns. Concerns about the market, however, include interest rate hikes and the impact from trade wars and tariffs.

More than 28 percent of survey participants believe the greatest threat could come from ongoing trade wars and tariffs, which impact the general economy as well as real estate construction costs. Over the last five to seven years, there has been a tremendous amount of new development activity as the industry has worked to catch up on significant pent-up demand.

“The competition for existing product and development sites is intense among institutions, private development firms, foreign investors and owner-users,” says Peter Schultz, executive vice president of Chicago-based First Industrial Realty Trust. “With rental rates increasing in response to higher construction costs and land prices rising at rapid speeds, we see prices continuing to increase and cap rates maintaining or even coming down a bit.”

The wild card, according to experts, is the tariffs. The general consensus is that the economy likely can withstand a 10 percent tariff, but the impact of a 25 percent tariff is another question. The greatest issue associated with tariffs and trade wars is the uncertainty that they create. And most companies, regardless of size, dislike uncertainty.

To access a copy of the 2018 Industrial Investor Sentiment Report, click here.

— Kristin Hiller

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