Category: Industrial

Industrial Sector Remains ‘Red Hot’ Despite Headwinds

Ongoing trade tensions do not concern investors in the industrial sector.

Investors still see industrial properties as favorably as they did six months ago, despite global trade tensions and labor shortages.

Trade talks between the U.S. and China are looming over the industrial sector. Due to these ongoing trade tensions, retailers are importing larger quantities of products than normal, in an attempt to beat potential hikes in tariffs on goods from China.

Barring successful negotiations, the U.S. plans to raise the 10 percent tariff on $200 billion worth of Chinese goods that took effect in September 2018 to 25 percent this spring. The U.S. has already imposed 25 percent tariffs on $50 billion worth of Chinese goods. On the other hand, reciprocal tariffs imposed by the Chinese government lowered Chinese demand for American-made goods. If this trend continues, demand from manufacturing occupiers could decline, according to real estate services firm Colliers International.

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Where Are Cap Rates Going in the Four Core Property Sectors?

Experts predict little change in either direction in the first half of the year.

With late 2018 jitters gone and investor optimism returning, the commercial real estate market should experience mostly steady cap rates through the first half of 2019, although there are particular market segments and geographies that could experience some bumps.

“On the interest rate side, I think everybody has dismissed, at least for the time being, the inflation threat so that kind of stress on pushing cap rates higher isn’t there right now,” says Manus Clancy, senior managing director of applied data, research and pricing with Trepp. “We went through a tough period in December when people were jittery. Now everybody has taken a deep breath; they don’t feel like the wheels are falling off either the U.S. or the global economy.”

Still some changes, although potentially muted, could be in store. Recent trends suggest there is little room left for cap rate compression, according to Matthew Schreck, quantitative strategist with online real estate marketplace Ten-X. “We expect increases to both interest rates and spreads to drive some loosening in cap rates in 2019 across all property types,” he says.

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HNW Investors Might Start Entering the Industrial Sector to Capitalize on Higher Returns

Historically considered too “unglamorous” by HNW investors, industrial assets now offer some of the best returns in the market.

By and large, it’s big institutional investors that scoop up industrial assets in the United States. However, there now appears to be more room for a different class of buyers in the industrial sector—high-net-worth (HNW) investors.

Why? Because industrial opportunities in secondary and tertiary markets—where there is likely to be less competition from institutional investors with big pockets—have grown more attractive.

A new report from commercial real estate services company Cushman & Wakefield says many of the dynamics that spawned the industrial boom, including the e-commerce explosion, will continue to play out in ways that bolster strong demand in secondary and tertiary markets, as well as across a broader array of asset sizes. And a recent report from asset manager DWS Group suggests smaller local distribution facilities—although not necessarily in smaller markets—“generally offer superior investment prospects.”

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Southern and Midwestern Towns Are Already Seeing a Manufacturing Renaissance. A New Maritime Regulation May Create a Nationwide Manufacturing Boom

With an expected increase in the cost of fuels used by ocean carriers, many manufacturing plants might move from Asia to the United States.

Manufacturing is once again a growing U.S. industry, especially in Southern “right-to-work” states, which tend to have lower wages than unionized states, and Midwestern cities with an abundance of highly skilled factory labor, according to Jack Fraker, vice chairman and managing director of global Industrial and logistics group with real estate services firm CBRE. In addition, there is a build-up in the high-tech manufacturing sector in Silicon Valley, with 1,500 manufacturing facilities with 65,000 jobs alone in San Jose, reports a local ABC News affiliate.

Due to this ramp-up in demand for industrial space in secondary markets, some smaller markets, like the Spartanburg-Greenville area in South Carolina, are performing more like primary, core markets, Fraker says. Growth in manufacturing in these towns is adding pressure on industrial vacancy and rent, and spurring new industrial development around plants and ports.

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New Opportunities Are Emerging for Industrial Investors

Cold storage might be the new frontier for industrial real estate investors as online grocery sales grow.

Over the last three years, nearly 1 billion sq. ft. of new warehouse space came on-line, but demand for new space continues to outpace supply, with absorption hitting a record 261 million sq. ft. in 2018, according to JLL’s 2019 Industrial Outlook.

With vacancy nationally dropping to a record low of 4.7 percent, real estate services firm Transwestern reported that the average national asking rent, which has been on an upward trajectory for six years, ended the fourth quarter at $6.29 per sq. ft. Of the 47 industrial markets Transwestern tracks, more than 90 percent experienced year-over-year rent growth, and all but four markets posted positive net absorption for the year.

The supply-demand imbalance, which has averaged 97.3 million sq. ft. annually for nine consecutive years, has driven rents up by 20 percent since 2014, according to a CBRE report.

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The Tightest Industrial Markets in the U.S.

A look at the major industrial markets currently with the lowest vacancy rates.

The continued proliferation of e-commerce remains a boon for the industrial sector. In all, North American industrial absorption is forecast to register 495 million sq. ft. in 2019 and 2020, with 550 million sq. ft. of new product delivered by year-end 2020. IN addition, vacancies will remain at around 5 percent and average asking rents will rise from $6.24 per sq. ft. all the way to $6.68 per sq. ft. by the end of 2010.

Those were some of the conclusions in Cushman & Wakefield’s recently released 2019 North American Industrial Outlook, which line up with the sentiment expressed in NREI’s recent industrial research study.

According to the firm, “Market conditions will encourage development in port-proximate markets, intermodal hubs, and inland population centers but supply will not overwhelm demand.”

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E-commerce Returns Provide Growth Opportunities for Industrial Real Estate Developers

The high rate of e-commerce returns is creating new opportunities for industrial real estate developers and investors.

Of the $500 billion in online U.S. sales last year, $75 to $150 billion worth of merchandise was returned, including $37 billion returns from holiday sales, according to a recent reverse logistics report from commercial real estate services firm CBRE. In fact, returns for online sales tend to be two to three times more frequent than returns for in-store sales: 15 percent to 30 percent of online purchases are returned compared to 8 percent of merchandise bought in-store.

A large number of these returns can be attributed to retailers sending customers the wrong size or wrong product, or giving an inaccurate description of the product, as well as product defects. Regardless of the reason, however, returns put enormous stress on the already tight warehouse space, labor and distribution networks that are not designed to handle reverse flow inventory and are eating up retailer profits, notes David Egan, CBRE global head of industrial & logistics research.

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Former Urban Big-Boxes, Class-B Office Buildings Are Being Converted to Last Mile Industrial Space

Investors are redeveloping empty retail big boxes, class-B office buildings in urban locations into last mile industrial facilities.

The limited supply of urban industrial inventory available for “last mile” e-commerce distribution space is causing investors and end-users to get creative by re-positioning other types of real estate with failed uses or shrinking demand, according to a JLL report, Urban infill: the route to delivery solutions.” The report notes that annual total e-commerce deliveries have more than tripled over the past five years, but development of new urban industrial infill assets has remained relatively flat.

Despite dwindling opportunities in urban locations, investors remain interested in the 18 percent sales price premium last mile industrial assets command over “first mile” locations, and the higher rents users are willing to pay in order to be near their customer base.

Older office buildings, underused parking structures, abandoned strip centers—even former churches—are now among properties being re-positioned as last mile fulfillment centers. E-commerce fulfillment centers are actually “terminal facilities,” as trucks deliver merchandise there to be broken down for home delivery trucks and other types of vehicles, according to Mark Glagola, D.C.-based senior managing director for industrial services with Transwestern. He notes that these distribution facilities are especially critical for time-sensitive merchandise like food products.

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