Industrial Investors Look For Bigger Returns With Class B and C Product
Pricing and cap rates for Class A industrial product are expected to stabilize for the remainder of this year, according to a new report from Cushman & Wakefield—though trophy properties in the Inland Empire of Southern California, New Jersey, South Florida, Seattle, and Dallas will reap the most aggressive overall rates.
Spring 2021 data from C&W shows that overall capitalization rates range widely by asset class, with a nearly 90 basis point difference between Class A and B industrial product and a 235 bps difference between Class A and C industrial facilities. And overall rates for Class C properties are clocking in 143 bps higher than their Class B counterparts.
Average cap rates for Class A assets ranged from between 3.25 and 5.5% in spring 2021 and declined by 33 basis points year over year, while Class B went down by 58 and Class C assets declined by 89 bps since last spring. And while demand for Class A product in core US cities has been strong, over the past five years rates began to stabilize.
“Little if any additional compression is expected for the remainder of 2021 and into 2022, with investors closely monitoring interest rates and 10- year Treasury yield rates,” the report states.
Cap rates for Class B and C product are logging the largest decreases as investors target more of the former to generate higher yields and returns from higher-priced Class A assets. The average for Class B product this spring fell between 4 and 7%, while the average cap rates for Class C assets ranged between 5 and 9%.
“Due to the lack of available and higher priced Class A product, investors are now targeting Class B and, in some cases, Class C product, seeking higher yields/returns—especially from those assets located near populated urban areas,” the report states. “Product close to urban areas has become the driver in order to reduce shipping and, more importantly, delivery times.”