The future of industrial real estate is being reshaped by lack of space in key markets where development is unable to keep up with demand, and investors are acting in accordance by looking elsewhere.
“Overall, it appears that investors remain aggressive, but pricing and overall rates are expected to stabilize or slightly increase with the anticipated rise in interest rates for the remainder of 2022 and into 2023,” reports the industrial real estate management firm of Cushman & Wakefield.
“However, Class-A properties located in the top United States markets will continue to command the most aggressive overall rates – predominately U.S. port cities,” it adds.
The company’s Spring IRE report also says that, because of limited availability and higher priced Class-A assets, investors are seeking Class-B assets and second tier (growth population areas) locations offering higher yield. Last-mile locations are still preferred in order to keep pace with the growing ecommerce customer base.
While assets with long-term leases may be in the highest demand and can command the most aggressive pricing in core markets, C&W stresses that Class-B and in some cases Class-C assets in secondary/tertiary locations are in greater demand with investors seeking higher yields.
“Acquisitions are moving forward with plenty of dry powder available to close quickly,” the company says. “The U.S. industrial market is not overbuilt, with net absorption forecasted to keep pace with upcoming supply.”
Solid rent growth is anticipated for the remainder of 2022 and into 2023, with double-digit total rent growth forecast in core markets over the next three to four years as demand grows in the face of lack of supply. Demand is driven in part by manufacturers boosting depleted inventories while supply chains, although still struggling, continue to ramp up.
Logistics, food and beverage, cold storage and bio tech/pharmaceutical assets are the preferred asset classes, C&W notes. “However, ecommerce is clearly driving the demand as online shopping continues to accelerate.”
The company adds that the fundamentals are in place to support a solid 2022 industrial outlook.
“Minimal concern is seen with the anticipated interest rate hikes relative to pricing, as investors see greater rent growth potential, solid demand for space (leasing velocity) and rising construction costs as offsetting factors and impacting any significant rise in cap rates.”
Skittishness Among Brokers
The Society of Industrial and Office Realtors finds signs of skittishness among its real estate broker members, as shown in its first quarter snapshot.
While still thriving, a growing strain on the IRE market is appearing as low vacancy and rising costs are leaving many industrial specialists searching for more opportunities, SIOR reports.
“With record land prices, construction pricing even higher, and limited supplies, making use of existing space in creative ways is becoming a necessary option,” the association points out.
SIOR members reported a 25% decrease in leasing activity in the first quarter, citing supply issues. In addition, 93% of them reported little to no vacancy in their markets.
Pricing is a major challenge, with 94% of members reporting high asking rents. “Vacancy levels are shrinking, giving tenants and buyers fewer choices with higher rents,” notes a Maryland SIOR member.
“There is a very limited amount of supply regarding industrial product types,” says a Kentucky-based SIOR industrial broker. “Tenants looking for space have to employ a broker who will call on off-market properties and explore all options.”