United States

Industrial’s record low vacancy rates and climbing prices


Investors nationwide are bullish on industrial, driving down cap rates and vacancies to sub-5 percent levels while stimulating new, large, sophisticated warehouse construction.

E-commerce and post-recession economic recovery are partially responsible for the 1billion sq. ft. absorbed in the last four years. Novel or nontraditional industrial users’ evolving needs combined with foreign and domestic firms reconsidering their portfolio management strategies are also contributing factors to this nascent unprecedented demand.

Who’s buying

The confluence of three major market forces is generating competition for the U.S. industrial stock.

1.   Foreign money

Foreign interest in industrial is robust. Chinese investment alone increased 540 percent from Q1 of 2016 to Q1 of 2017.

“There is a lot of foreign money coming into the U.S., but it seems universally agreed upon, on both the buy and sell side, that the money is coming in through private equity funds rather than direct investment,” Adam said. “This is primarily because individuals are not that market savvy, nor do they understand the fundamentals or are able to navigate the process and regulations, so for people who want to invest, a fund is a convenient vehicle.”

Although Asian money is certainly becoming more prominent, Canada remains the dominant foreign industrial investor, acquiring 43 assets accounting for $831 million in Q1.

2.   American buyers

“There remains a lot of domestic money on the sidelines that uncertain investors held after the recession,” Adam said. “Now, many funds in the U.S. are reallocating to industrial, even those that traditionally focused exclusively on retail, office and multifamily.”

The availability of debt has also facilitated transactions in recent years. “The sheer volume of transactions we are seeing with our owner and lender clients is unbelievable,” said Adam. “The increase in transactions allows industrial owners to have leverage with lenders including favorable interest rates, competitive financing terms and compressed due diligence time frames.”

3.   Construction difficulties

“The entitlement process on the construction side is tough, because more regulatory constraints are being placed on banks for construction loans,” Adam said. “When ground-up is difficult, it makes buying and renovating an existing building more attractive.”  Adam added, “Industrial is not only reliable, but also relatively flexible.”

She notes that a high-profile investor bought a building formerly leased to a large national department store, and was able, with minimal modifications, to find perfectly suitable functionality in the interior, despite the product’s age. “Industrial tenants may not be as picky or particular compared to corporate tenants renting office space,” Adam said.

What’s changed

For e-commerce companies, consumer and logistical data is invaluable, readily available and more actionable than ever.

“The mass collection of data coupled with more precise analytical features gives companies more granular detail on the best cities to buy industrial in, and more clarity on what tenants they will want,” Adam said. “I don’t hear that in other property types.”

The ability to forecast need gives buyers more confidence and increases their propensity to spend.

“Labor supply is also a major consideration for e-retailers, and investors are becoming more cognizant of this too,” Adam said. “Cities supported by well-populated suburbs where the best and brightest in the workforce reside are optimal.”  

According to the Bureau of Labor Statistics, around 675,000 people worked in the warehousing and storage industry in 2007. In ten years, that number has climbed to 950,000, and many are seriously concerned about a talent shortage. The fact that a significant percentage of employees still commute via car means that they need parking, making heavily staffed warehouses inappropriate for high land value areas.

Companies, however, are leveraging innovative inventory management software and equipment to reduce the head count at facilities. Many want smaller urban warehouses to fulfill last-leg logistics requirements and 100,000 sq. ft. spaces with higher clear heights for mass processing.

What it’s being used for

According to Adam, one growth area is prepared foods and meal kit services, with Amazon emulating Blue Apron’s business model and others attempting to eliminate the need among home cooks to shop for groceries. 

“Indoor and outdoor home furnishings operations like Wayfair and Hayneedle are rapidly growing,” Adam said. “Also, truck yards and grain elevators are taking industrial spaces to use as container yards.”

According to Prologis’ global head of research, Chris Caton, for every $1 billion in sales, an online retailer needs 1.4 million sq. ft., more than triple what traditional retailers need. With this multitude of uses and e-commerce’s growth and diversification, industrial demand shows no signs of attenuating.

This article, authored by Alec Berkman, was originally published September 19, 2017 in Bisnow


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