Industrial Investors Drive Cap Rates Lower in Secondary and Tertiary Markets

Going into smaller markets in search of yield, industrial investors are starting to cause cap rate compression in those areas.

Investors don’t like the high pricing and low cap rates on industrial assets, especially since cap rates continue to compress in some markets. But they still want to invest in this asset class, because continued rent growth and low interest rates should boosts net operating incomes (NOI), overcoming low yields during the first year or two of a 10-year investment horizon, says Jack Fraker, vice chairman and managing director of global industrial and logistics with CBRE.

Strong market fundamentals, including low vacancy and robust demand, have continued to attract investors to the asset class, increasing values and leading to sustained cap rate compression, according to CBRE’s first half 2019 cap rate survey.

Demand for industrial space is still outstripping supply, despite a record-high construction pipeline that delivered 126.8 million sq. ft. of new space in the first half of the year. Another 327.5 million sq. ft. underway, according to Cushman & Wakefield’s second quarter 2019 MarketBeat industrial report. Net absorption for the first half of the year totaled 88.6 million sq. ft., and new leasing activity in the first two quarters involved 256.6 million sq. ft.

With demand for logistics facilities still going strong, vacancy has remained at or below 5.0 percent, according to Jason Tolliver, managing director of investment services at Cushman & Wakefield.

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