Category: Industrial

Proximity to Rail Service to Play a Bigger Role in Industrial Site Selection

As rail service has become faster, industrial developers are increasingly considering rail access in site selection.

A growing truck driver shortage, along with improved efficiency of U.S. rail operations, has more shippers considering rail transportation as a viable alternative to long-haul trucking. As a result, some developers are placing new industrial development projects adjacent to rail access sites.

Industrial developers and investors are considering the advantages of rail access when choosing locations for new projects, says Tray Anderson, who heads the logistics and industrial services platform in the Americas for real estate services firm Cushman & Wakefield. While rail access doesn’t drive location decisions, it has become a risk mitigation strategy, offering an alternative to trucking if the driver shortage escalates.

Rail’s efficiency, safety, cost savings and superior delivery windows are widely recognized, says Reagan Shanley, executive vice president of industrial development at Denver-based The Broe Group and its affiliate OmniTRAX, a railroad developer/operator that connects businesses to class I railroads nationally. A 2018 American Trucking Association’s study found that moving products by rail was 45 percent less expensive per ton than shipping by trucks. The exceptions, according to Anderson, include non-competitive destinations only served by one rail line and seasonal shipments of agricultural products, when pricing escalates.

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Eight Predictions for the Industrial Sector in 2020

Industrial properties have been highly sought-after by investors for the past several years. Will that trend continue in 2020?

New project deliveries, continued cannabis legalization, a decline in manufacturing, faster e-commerce deliveries and the upcoming presidential election will all have an impact on the U.S. industrial sector in 2020, experts say. Here are eight predictions for the industrial sector in the new year:

1. The rush to cannabis production will likely accelerate in 2020, as more states legalize marijuana for recreational use, attracting investors to the higher returns cannabis-related real estate provides compared to more traditional property types, according to Chuck Taylor, director of operations for Englewood Construction, which collaborates with cannabis firms on cultivation and dispensary projects.
2. Demand for “last mile” warehouse space will continue to grow in 2020, as consumers demand same-day and next-day delivery and retailers intensify their delivery efforts to complete with e-commerce giants like Amazon and Walmart, says Nat Kunes, senior vice president of investment management at AppFolio, a property software firm. As a result, he expects to see conversion of traditional retail space to distribution facilities.

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Will the U.S. Industrial Sector Feel Any Impact from Phase I of the Trade Deal?

The first part of the trade deal with China is expected to be signed in a week, resolving some uncertainty around trade issues.

The Trump Administration is expected to sign a trade deal with China on January 15, a development that is expected to help farmers, electronics producers and financial services firms. However, 25 percent tariffs will remain on $370 billion in goods, including parts used in manufacturing and construction materials.

Although the administration has repeatedly claimed the tariffs are being paid by China, a New York Federal Reserve study confirmed what many tariff-opponents have argued from the start–that the tariffs are simply being passed through by importers and costing Americans an estimated $40 billion annually.

The new trade deal will eliminate a proposed 5 percent tariff hike on $250 billion in Chinese-made cell phones, laptops and toys; will scale back tariffs from 15 percent to 7.5 percent on $120 billion in other Chinese consumer goods; and will feature China’s agreement to buy an additional $200 billion in U.S. goods over the next two years.

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Industrial REITs Are Expected to Continue Outperforming Their Peers in 2020

E-commerce will likely continue to drive strong returns for industrial REITs next year, while challenging mall REITs.

Against the backdrop of this year’s Cyber Monday generating record-shattering online sales estimated at $9.2 billion, commercial real estate experts envision e-commerce-fueled industrial REITs being a shining star of the REIT show in 2020. Meanwhile, in tandem with the e-commerce explosion, regional mall REITs will continue to face challenges next year, experts say.

“The e-commerce-driven demand … that has allowed industrial to stay in the sweet spot has pushed most retail into recession,” Green Street Advisors Inc., a Newport Beach, Calif.-based provider of real estate research and advisory services, noted in a November 2019 commercial real estate outlook.

Despite the fact that commercial real estate services company CBRE predicts industrial supply in the U.S. will outpace demand by 20 million to 30 million sq. ft. next year (representing just 0.2 percent of industrial inventory), real estate observers predict the industrial REIT sector will remain vibrant in 2020. In fact, Green Street foresees an increase of 100 basis points in industrial rent growth next year; in the third quarter of 2019, industrial REITs posted an occupancy rate of 96.3 percent, according to trade group Nareit.

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Single-Tenant Net Lease Sales Volume Is on Pace for a Record Year, with Industrial Assets in the Lead

Industrial single-tenant net lease properties are highly coveted by institutional and private equity investors.

In a market rife with uncertainty, investors seeking risk-adjusted, recession-proof opportunities continue to be attracted to single-tenant, net-lease assets. As a result, total single-tenant net lease sales volume at the end of the third quarter had increased by 24 percent year-to-date, to $55.2 billion, according to a recent report from CBRE. It is now on pace to exceed last year’s sales record of $69.6 billion, according to the real estate services firm.

“This sector is growing and will probably total more than $70 billion this year in transaction volume,” says Will Pike, chairman and managing director of the CBRE net lease property group and corporate capital markets.

The industrial sector has been leading single-tenant net lease sales, with transactions totaling $22.3 billion year-to-date at the end of the third quarter, compared to $19.8 billion during the first three quarters of 2018. In the third quarter, single-tenant net lease industrial transactions jumped 48.5 jump to $10.2 billion, compared to $6.9 billion during the same period last year.

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Two Companies Are Dominating the Battle for Warehouse Space

Between them, Blackstone and Prologis have made more than $38 billion in warehouse acquisitions in 2019.

(Bloomberg)—It’s the year of the warehouse mega-deal, and the two largest players are running away from the pack.

Blackstone Group Inc. and real estate investment trust Prologis Inc. are locked in an Amazon-fueled acquisition battle, gobbling up U.S. warehouse space in a bid to profit from rising consumer demand for fast shipping.

Together, the two companies have inked warehouse acquisitions worth more than $38 billion in 2019. More than 40% of that total comes from a pair of deals announced in the last month.

“There’s a huge amount of demand coming from e-commerce,” said Lindsay Dutch, a Bloomberg Intelligence analyst. “The growth of online shopping and the desire for quick delivery times has really driven a need for more warehouses, especially in the last mile.”

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Are Industrial Developers Heading Toward Overbuilding?

A recent paper from NAIOP predicts lower absorption over the next two years, but it’s unclear if industrial developers are taking heed.

Industrial users are expected to absorb about half as much space quarterly over the next two years as they did in 2018 and 2019, when quarterly absorption averaged 60 million sq. ft., according to the semi-annual Industrial Space Demand Forecast from the National Association of Industrial and Office Properties (NAIOP).

This predictive model, which was co-developed by Hany Guirguis, professor of finance and economics at Manhattan College, and Randy Anderson, formerly of the University of Central Florida, is based on a process that involves testing more than 40 economic and real estate variables related to demand for industrial space and has been shown to be relatively accurate. In 2018, 222.2 million sq. ft. of absorption was forecast, which was in line with actual absorption of 229.5 million sq. ft.

The most recent lower forecast is based on a slowdown in U.S. economic growth, as the impact of tax cuts wears off and business spending and investment declines due to economic uncertainty initiated by the trade war with China. Other factors adding to the uncertainty, according to authors of the NAIOP report, include: a slowdown in Chinese and European economic growth and continued uncertainty over the impact of Brexit.

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Blackstone Extending Warehouse Bet in $5.9 Billion Colony Deal

The agreement follows Blackstone’s acquisition of $18.7 billion of warehouses from Singapore’s GLP Pte. earlier this year.

Blackstone Group Inc. has acquired more than 1 billion square feet of logistics space since 2010 as part of the firm’s global bet that the rise of e-commerce is driving demand for last-mile real estate.

The private equity giant is extending that effort, agreeing to acquire Colony Industrial, the warehouse arm of Colony Capital Inc., for $5.9 billion. The deal includes about 60 million square feet of warehouse space across 465 light industrial buildings in 26 U.S. markets, as well as an affiliated operating platform, according to a statement Monday. The unit’s properties mostly serve as the last mile of the logistics chain and are crucial for companies seeking to make speedy deliveries to consumers.
The agreement follows Blackstone’s acquisition of $18.7 billion of warehouses from Singapore’s GLP Pte. earlier this year.

“We’ve been the big buyer of warehouses around the world, probably bought $70 billion, on the simple premise that goods are moving from physical retail to online retail,” Blackstone President Jonathan Gray said in a Sept. 25 interview at the Bloomberg Global Business Forum.

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Black Creek CEO Raj Dhanda Talks About Why It Still Makes Sense to Buy Industrial Assets

In spite of low cap rates, Black Creek still sees opportunity in industrial and multifamily acquisitions.

Real estate investment management firm Black Creek Group recently reported that its fundraising had surged to $702 million through July 31, 2019, including $290 million in equity commitments from institutions. The company raises capital across different solutions, including its two non-traded REITs. Black Creek has been busy putting that capital to work. During the first seven months of the year, the firm acquired 4.7 million sq. ft. of assets and has 3 million sq. ft. of industrial properties under construction. Black Creek’s holdings currently span about 67 million sq. ft. of industrial, multifamily, office and retail assets. NREI recently talked to Black Creek CEO Raj Dhanda about the firm’s recent capital raising and the market climate for new acquisition and development opportunities.

NREI: Your firm raised $702 million through July 31st as compared to $817 million for the full year in 2018. What’s driving that momentum?
Raj Dhanda: I think there are a couple of factors contributing to our success. One is more specific to Black Creek. Black Creek’s story of being focused on a real estate operating model that combines acquisitions and development to assemble portfolios one property at a time is in demand and attractive to a lot of different investors. More broadly, I think commercial real estate continues to be an asset class that is benefiting from capital flows and increased investor allocations. Of course, low interest rates and a fundamentally strong economy don’t hurt either.

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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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