The industrial landscape has experienced an unprecedented run over the last few years, breaking records on a global scale.
Each market has its own unique story, but they have all been a part of a truly transformative environment that is repositioning antiquated property, pushing building design, pricing, and real estate professionals in ways that we have not seen before.
While competition across industrial remains robust, many are asking what lies ahead for the sector. To help answer the question, I had the opportunity this week to speak with 6 top brokers about leading trends. Provided are the key takeaways:
Capital markets are quickly adjusting. Frank Schulz, SIOR, and Managing Principal of Klabin in Los Angeles has watched firsthand the impact of uncertainty and rising interest rates on underwriting. “Investors have quicky adjusted to account for the increased cost of capital. In SoCal, deals that were priced at a 3% yield nine months ago are now well above 5%. Interest rates are not the only story as investors closely evaluate risk with changing growth assumptions creating a drag on pricing.” A large number of investors are “pencils down” at the moment. “That said, if an owner had to sell today, they are still likely to receive double what they would have just 24 months ago.”
Florida is experiencing similar trends. “The capital markets and investor pool have tapered off, matching sentiments nationally resulting from the Fed’s significant interest rate hikes in an effort to control inflation. In terms of leasing activity, the big-box occupiers are still circling the Central Florida markets, but not many are signing up just yet. We may see more of those leases inked in the coming year,” according to Jessica Mizrahi, SIOR and Managing Director with Cushman & Wakefield in Tampa. “What will be interesting to follow here and nationally is if increased sublease opportunities are placed on the market, signaling a possible softening in warehouse and distribution space needs.”
Dan Smolensky, SIOR, a Principal with TMG Real Estate Advisors in Chicago addressed the demand question head on, commenting “The need for industrial space continues to be strong, but users are cautious because pricing for class A space has increased 30-40% price from pre-pandemic rates. While the market appears to remain strong and stable, the pace of decision making has slowed down.”
An interesting ongoing dimension is the limited supply of highly functional buildings and its impact on industry fundamentals. The average national vacancy rate rests below 4%. Sim Doughtie, SIOR, and President of King Industrial in Atlanta commented, “Rental rates in our market have been consistently on the rise year over year.”
On the development front, most major cities are expected to benefit from additional supply, as various areas stay confronted with vacancy rates below 1%. Sim added, “Everyone asks if we are building too much space and I just tell them that over the past 8 years we have built over 200 million square feet in Atlanta and the availability rate has declined from 14.3% to 9.3%. For the moment, we are absorbing what we are building.”
Mike Ciosek, SIOR and Partner at Kidder Mathews in Phoenix added, “We have enjoyed the clarity of cheap money, e-commerce evolution, and out of state migration as a result of recent events. Higher interest rates in 2023 and beyond will likely keep Phoenix and other Landlords of existing product full, as speculative developments could be delayed based on cost of capital.”
Jason Crimmins, SIOR, President of The Blau & Berg Company in New Jersey recognized headwinds but also sees opportunity. “The aggressive rate hikes giving way to an increased cost of capital has certainly slowed acquisitions. We have seen +/-15% price adjustments across the board. The leasing velocity also declined for the second straight quarter, back to pre-pandemic levels, due to the limited amount of space available. Nonetheless, we are still at capacity with our vacancy level at a historic low and the market fundamentals remain relatively healthy.”
Looking ahead to the New Year, the overall pipeline is one of the highest on record with a reported 600+ million square feet currently under construction in the United States.
Despite economic uncertainty clouding forecasting, the future of industrial real estate appears bright. However, if we have learned anything in recent years it is to expect the unexpected. Those who maintain a quick and nimble mindset will be best equipped to capitalize on whatever tomorrow brings.
Diligence and early planning complimented with a highly skilled real estate broker will always be critical to achieving your goals. Not sure where to start? Go to sior.com to find the industry’s leading professionals.