Tag Archive for: cushman and wakefield report

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The U.S. industrial real estate market will continue to be on fire heading into 2022 but longer lead times to obtain construction materials and across-the-board price increases will also affect the sector.

Cushman & Wakefield PLC took a two-year look into the future, predicting industrial absorption from the start of 2022 to the end of 2023 will be 855 million square feet. Although demand will be high, and issues will make new industrial development challenging, Cushman expects new supply will slightly outpace demand in the next two years, which’ll help moderate the market somewhat.

Cushman is predicting new industrial deliveries will reach 932 million square feet in 2022 and 2023. E-commerce is a big reason — but not the only one — behind the warehouse sector’s massive growth since the pandemic. Online sales rose to 21.6% of total retail sales in the second quarter of 2020, compared to 16.2% in Q1 2020, and remain around 20% as of Q3 2021, according to CBRE Group Inc. (NYSE: CBRE) research.

“2021 was the best year ever for industrial real estate,” said James Breeze, senior director and global head of industrial and logistics research at CBRE, during a recent forecast call with reporters.

Third-party logistics have dominated industrial deal activity this year, a share that could grow in 2022 as costs continue to rise, and space and labor becomes more challenging to find.

“Many retailers or wholesalers will outsource their distribution to 3PLs at a greater clip in 2022,” Breeze said. “This outsourcing is going to be prevalent throughout the country.”

CBRE is forecasting vacancy rates next year for warehouses to remain at or even below 3.6% in 2022. Cushman is predicting industrial vacancy in North America will end 2023 at 4.1%. Expect rents to continue to rise for industrial occupiers, too. Cushman is forecasting average net asking rents for warehouse space in North America will reach a new high of $8.72 per square feet by the end of 2023.

“Even with the rental-rate hikes, tenants need warehouse space so much they’re willing to pay the new rates,” said Erik Foster, principal and head of industrial capital markets at Avison Young USA Inc.

“In fact, transportation costs are a bigger concern for many groups leasing warehouse space,” Breeze said.

Real estate costs are typically only 3% to 6% of total logistics costs, compared to 50% for transportation. The cost to ship goods via ocean freight grew more than 200% in 2021, while domestic-freight costs jumped more than 40%, according to CBRE.

 

“Leasing more space may actually save some occupiers money, if they are able to use additional facilities to cut down on domestic or international transportation,” Breeze added.

Investment activity for industrial real estate is expected to remain hot in 2022. Since the pandemic, some capital sources have pivoted away from uncertain asset classes, like retail and office, and instead poured money into industrial and multifamily, both of which have been on a tear in 2021.

Capitalization-rate compression across several U.S. markets has been observed in 2021 and is expected to continue, but cap-rate spreads between primary and secondary markets will be observed, CBRE predicts.

CBRE is predicting Phoenix and Las Vegas will post cap rates in line with the Inland Empire, about 3.1% in the first half of 2021, in 2022. Prices in the Pennsylvania Interstates 78/81 corridor are expected to be closer to those seen in New Jersey industrial markets, about 2.9% in H1 2021, says CBRE. Northern and central Florida could approach cap rates observed today in south Florida. Miami industrial real estate saw cap rates averaging 3.75% in H1 2021.

“With the amount of investor interest in industrial right now, there are some groups that don’t have much experience owning or operating warehouse real estate,” Foster said. “We’re seeing folks that are sophisticated, with real funds behind them, move in like never before to an asset class that they don’t know that well, which can cause risk.”

 

Source: SFBJ

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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.”

 

 

Source: GlobeSt

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As industrial took off in 2020, so did new construction in Florida markets. In many of those areas, completions have reached historic levels.

In the second half of 2020, large-scale speculative construction projects or expansions at existing industrial parks were announced in multiple Florida markets, according to Cushman and Wakefield’s “Florida Industrial Construction” report.

There was 15.4 million square feet (MSF) under construction at the end of 2020. In addition, another 29.7 MSF is poised to come online in the next three years.

Out of this new construction, speculative building dominated. At the end of 2020, 5.8 MSF of speculative building had been completed. C&W says Build-to-Suits accounted for 43% of all completions. Many of those speculative projects under construction have yet to attract tenants. By the end of 2020, only 56% achieved any pre-leasing.

“In several cases, developers moved ahead with entitlements hoping to land a sizeable build-to-suit for a new-to-market or expanding tenant,” according to C&W.

Drilling down into individual markets, Miami leads the way with 8.7 million square feet of industrial space proposed. Tampa Bay (6.0 million), Lakeland (5.8 million), Jacksonville (3.7 million), Broward (2.4 million), Orlando (2.0 million) and Palm Beach (1.2 million) are next.

Tampa Bay leads with 3.4 million square feet of industrial space under construction. It is followed by Miami (2.7 million), Broward (2.2 million), Orlando (2.2 million), Jacksonville (1.9 million), Lakeland (1.7 million) and Palm Beach (1.4 million). The highest preleasing was found in Lakeland (91%), Jacksonville (84%), Orlando (60%) and Miami (50%).

In a recent report focusing on Jacksonville, Colliers International found that construction, which represents about 1.9% of the current industrial stock, created a “trickle-up” effect where industrial users are shedding dated space for quality new construction product. The trend has produced a combination of rising industrial vacancy—which hit 5.4% in the fourth quarter—and rising rents—which increased to $5.21 per square foot.

While other asset classes are closely monitoring the vacancy rate—typically because a rising rate leads to tempered if not negative rent growth—Colliers says that increased vacancy is actually a welcome relief in the Jacksonville industrial market. In 2018, the local vacancy rate reached lows of 2%, giving users limited options. Today, the increased rate of 5.4% still points to healthy market conditions, and new construction activity is well matched to demand.

Nationally, industrial space is getting absorbed. In a recent report, Moody’s Analytics said the warehouse/distribution space absorbed 35.4 million square feet in Q4, its highest mark since Q1 2019 when 70.7 million square feet were absorbed.

Construction for the new warehouse/distribution space fell to 25.8 million square feet in Q4 after hitting 38.2 million square feet added in Q3, according to Moody’s Analytics. The space has posted an average of 36.8 million square feet of new inventory added per quarter in the prior six quarters.

 

Source: GlobeSt.