CARLSBAD, CA—Institutional, private and foreign investors all continue to pour capital into the industrial sector, confirming there is still “plenty of runway left,” according to a new Real Capital Markets-SIOR Industrial Investor Sentiment Report.
The overall findings of the report show plenty of capital and positive momentum in the industrial sector despite looming threats from rising interest rates, tariffs, and a diminishing supply of quality assets.
“The industrial sector continues to attract plenty of attention from investors, and that’s a trend that shows no sign of slowing,” says Steve Shanahan, Executive Managing Director, Real Capital Markets. “The increasing sophistication of developers and investors—and the strong fundamentals at the core of this asset sector—should support strong activity in the foreseeable future.”
RCM and SIOR aggregated insights and perspectives from industrial market experts—investors, developers and brokers—across the country in compiling the report. The report shows that industry experts are even more bullish on the outlook for the industrial market than they were in 2017.
Year over year comparison
Questions in the 2017 and 2018 RCM-SIOR reports tracked participants’ perceptions of investment activity, pricing and cap rates. Responses underscore the sentiment that the market remains on solid footing, even if there is a slight tempering of enthusiasm. Comparatively, and most notable are:
- Activity—More than 48 percent now suggest that activity will remain at or about the current level whereas one year ago the figure was 43 percent.
- Industrial Pricing—More than 38 percent of respondents in 2018 anticipate pricing increases of five percent or more; in 2017 that number was 34 percent.
- Cap Rates—In 2018 44 percent believe cap rates could go higher compared to 35 percent in 2017; 18 percent now see the potential for further compression versus 17 percent in 2017.
E-commerce and the economy are a powerful and impactful one-two punch
Sustained growth in e-commerce and the general state of the economy have been a powerful one-two punch for the industrial sector over the last two years, as consistently noted by 71 percent of participants surveyed for the report. Some market projections show e-commerce growing at a rate that translates to demand for approximately 180 million square feet of logistics space by 2020.
Last mile is first for emerging and expanding opportunities
Market experts view last mile/in-fill development product as the most prominent, highly-sought after opportunities, as users want to be as close as they can to population centers. Accordingly, an overwhelming majority of respondents (52 percent) confirmed their bullishness on last mile and in-fill development opportunities.
Last mile properties are particularly important for the burgeoning grocery/food delivery needs. Following Amazon’s acquisition of Whole Foods, numerous other retailers, such as Walmart and Kroger, also offer delivery services requiring last mile facilities to fulfill same day and next day orders. The challenge is finding sites that are suitable for today’s needs such as parking, truck traffic and dock use.
Interest rates, tariffs and availability of quality product viewed as threats
The industrial sector has experienced a record level of activity over the past several years, as investors moved into this sector in search of stable, long-term returns. Industrial assets are now competing head to head with multifamily and office assets for many investors’ attention.
There are concerns about the market, however, including interest rate hikes, and the impact from trade wars and tariffs.
More than 28 percent of survey participants believe the greatest threat could in fact come from ongoing trade wars and tariffs, which impact the general economy as well as real estate construction costs. Over the last five to seven years there has been a tremendous amount of new development activity as the industry has worked to catch up on significant pent-up demand.
The wild card, according to experts, is the tariffs. The general consensus is that the economy likely can withstand a 10 percent tariff, but the impact of that going to 25 percent is another question. The greatest issue associated with tariffs and trade wars is the uncertainty that it creates. And most companies, regardless of size, dislike uncertainty as it can create an inability to plan with a level of confidence that is required to make well-informed decisions.
No stopping us now
Del Markward, the 2018 SIOR President expects that while the pace of activity could taper, sale prices and cap rates will remain strong, due in part to the level of foreign capital looking to find a home. “The U.S. remains the safest place to put capital,” he says.
“The industrial market and those who invest in it, have enjoyed an incredible, long run because of its ability to adapt to the needs of specific users and subsectors, and embrace the ongoing evolution of the global economy,” says Tina Lichens, COO, Real Capital Markets. “Given this performance and consistency, we have every reason to believe there is plenty of runway left.”
To download a copy of the RCM-SIOR 2018 Industrial Investor Sentiment Report, click here.
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Founded in 1999, Real Capital Markets (RCM) is the global marketplace for buying and selling CRE. RCM increases the speed, exposure, and security of CRE sales through its streamlined online platform. Solutions include integrated property marketing, transaction management, and business intelligence tools to unify broker-level and firm-level data and work flows. RCM has executed over 62,000 assignments with total consideration in excess of $2.1 trillion. Approximately 50% of all U.S. commercial assets sold, over $10 million, are brought to market using RCM’s online marketplace annually.
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Report download: 2018 Multifamily Investor Sentiment Report