Tag Archive for: industrial sector

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Industrial, with multifamily one of the two investment darlings of the pandemic and after, did relatively well in November.

But not well enough as it still took a big hit according to MSCI’s November 2023 report on the sector. It took a 64% year-over-year drop.

“Deal volume through November puts the sector behind apartments as the second most traded sector for the year,” they wrote. “Deal volume still fell in November even with these positive elements supporting the sector. Macro forces have simply made it difficult for investors to underwrite investments.”

Individual asset sales took the biggest hit, down 69%, a change from early in the year.

“The pace of sales for individual assets had fallen at a 53% YOY rate in April and had generally improved in subsequent months,” MSCI wrote. “It is unclear at this point if the 69% decline is simply a number that will be revised up in coming months as smaller deals are found or a sign of a new sense of hesitancy.”

Flex saw a drop of 76%; warehouse was down 61%. The smallest drop was in portfolio and entity, at 36%. Things look better on a year-to-date year-over-year basis. Total industrial was off by 49%. Flex was down 63%, warehouse dropped by 46%, single access fell 41%, and portfolio and entity dropped 64%.

There were no “entity-level deals” during November. That wasn’t an additional loss compared to 2022 as there were also none last November. But had there been, the month might ultimately have looked different with a large boost to the total. Overall, these big-level deals have undergone a major shift. In 2022, they represented 16% of the entire total industrial investment. This year, the cut is 3%.

Even if things had been better in November, with declines that were no worse than October, the chances of 2023 matching 2022 would still have been slim.

“To match the $160b of industrial property sales seen last year, sales in December of this year would need to total $84b,” wrote MSCI. “The single strongest December ever was in 2021 when $37.1b sold.”

More than doubling a previous record, given the current pace, seems unlikely. On the positive side, industrial property prices have done better than other sectors.

“The RCA CPPI National All-Property Index fell 8.0% YOY in November but the industrial index climbed 1.8%. Industrial investors were losing ground relative to inflation at this pace, but a gain is a gain and this pace was the strongest across all property sectors.”

 

Source: GlobeSt

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

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The stock market has been on a tumultuous ride as of late, making commercial real estate even more attractive to investors looking for stability amid the chaos.

“I think it gives everyone a little heartburn to see the S&P 500 fall by more than 6% in a little over a week,” says Marcus & Millichap’s John Chang. “But the stock market has been on this trend for awhile.”

Specifically, the stock market is down by 10% over the last month and by 24% from the peak at the beginning of this year. And while it gained 27% in 2021, the losses this year have basically wiped out last year’s gains. The CRE market also had big pricing gains last year, according to Marcus & Millichap data, led by industrial at 17.9%, self-storage at 13.6% and apartment at 8.1% The difference?

“While the stock market peaked at the end of 2021, “commercial real estate kept going,” Chang says.

In the first half of 2022, the average industrial prices went up by 13%, self-storage went up by 10.5%, and hotels increased by 13.7%. Meanwhile, in the first half of 2022 the stock market fell by 20%.  The caveat, however, is that pricing is typically locked in 90 days before a deal closes, meaning second quarter pricing numbers were probably locked in before the Fed began aggressively raising rates.

Chang says the Fed’s press conference after its latest hike on September 21 “will probably impact” CRE pricing, “but the impact will be far less severe than what we’re seeing on Wall Street.”

“In general, CRE values tend to move more slowly than the stock market. They also tend to be less dramatic,” Chang says, adding that quarter-over-quarter pricing swings over the last 20 years have been “enormous” while commercial real estate pricing has largely remained steady.

Total annual returns also drive this point home, with CRE delivering a compound annual growth rate of 7.8% since 2000, beating the S&P at 5.3%.

“It still has its ups and downs, but its amplitude tends to be very modest compared to the stock market,” Chang says.

 

Source: GlobeSt.

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Labor scarcity will be among the major headwinds driving industrial commercial real estate decisions in 2022 as record shortages challenge distribution channels and unemployment hits a near-historic low.

“With industrial related hiring already at all-time highs, the continued need for labor to service growing e-commerce demands, combined with an economy at nearly full employment, is exacerbating the labor shortage for distribution workers in many markets,” a new Colliers report notes, adding that the US unemployment rate is now near a 50 year low of 3.5%.

And while so far, the industrial sector has managed to post record growth, the labor shortages span “nearly all demographic groups and affect the entire American economy,” and continuing lows will slow the rate of economic growth and slow manufacturing output, Colliers predicts.

“While automation and advanced technologies are becoming more prevalent and affecting industrial employment, the future will still rely on highly skilled labor to operate complex systems and machinery, alongside robotics—labor that is increasingly more difficult to find,” the Colliers report notes.

In addition, scarce land availability will continue to impact the sector. Prologis reports that construction starts have risen to an all time high of 120 million square feet in the sector, but the firm notes that new supply is mainly concentrated in low-barrier secondary and tertiary markets and the outlying submarkets of inland markets.

While a record level of new supply is expected by the end of 2022—including massive build-to-suit projects for e-commerce suppliers and big-box chains—land near big population centers is increasingly scarce.

“Companies seem willing to pay a premium price for land with fierce competition for developable sites,” Colliers analysts note. “This competition is also driving up industrial rents, especially for logistics space near US seaports.”

Colliers also notes that facilities in excess of 2 million square feet are increasingly popular in dense markets as retailers attempt to establish footholds closer to consumers and shorten delivery times. The firm is tracking 12 such big-box multi-story industrial mega centers currently under construction, and notes that a vast majority are for Amazon.

 

Source: GlobeSt.

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CRE shattered performance records in the third quarter, driven by household wealth and record demand.

“Some of the results are shocking,” Marcus & Millichap’s John Chang says. “I anticipated strong commercial real estate momentum in the third quarter as the lockdowns had pretty much ended, new households were being formed, spending had increased and companies were shifting their positioning toward stronger growth⁠—but I was still surprised. At the start of Q3, many companies were taking a wait-and-see approach, and leasing was soft.

But despite that, about 26 million square feet of space was leased in Q3, on par with the quarterly pace of demand from 2018 and 2019. That brought vacancy down 10 basis points to 16.1%.

“Expectations for retail were positive going into Q3, but I don’t think they were very optimistic,” Chang says.

But the sector outperformed, filling 28 million square feet of space in the quarter and posting the best quarterly absorption numbers since 2017. Total occupied retail square footage is now officially back above pre-COVID levels, and vacancy fell by 20 basis points. Average rents also rose 2% year-over-year.

“I wouldn’t say the retail real estate sector is crushing it, but compared to most people’s perception, retail is outperforming expectations and also surprised to the upside,” Chang says.

As for apartments, 273,700 units were filled in the quarter, a record absorption number for the sector. Developers are on pace to deliver a record 400,000 units this year, and the national vacancy rate hit 2.8% for the quarter. Rents are also up 11.2% year-over-year.

“I don’t think anyone was expecting an all-time low vacancy rate and double-digit rent growth,” Chang says.

And in the industrial sector, rent growth was up 3% quarter-over-quarter and 8% year-over-year, in alignment with most forecasts. The surprise? Absorption: 157 million square feet were absorbed in the quarter, bringing the annual total to 364 million square feet so far.  That shatters 2016 highs.

“The third quarter delivered better than expected results with some record-breaking space demand numbers,” Chang says. This will likely add more fuel to investor optimism, especially in the office and retail sectors where expectations have been more modest.”

Chang has said he expects the momentum continue into the end of 2021. Supply and demand trends remain favorable, and active investors continue to price strong growth into their underwriting, particularly for industrial, self-storage and apartment properties.

 

Source: GlobeSt.

 

Will the potential economic slowdown have a significant effect on the commercial real estate market in South Florida? Not really, says Nathan Perlmutter, vice president in commercial lending at TD Bank, in this podcast.

Listen to the podcast for more insights on:

  • Projections for the multifamily sector.
  • Miami office sector trends that CRE experts are watching in 2020.
  • The impact of the global trade war on the industrial sector’s growth.
  • How landlords are adjusting to major changes in the retail landscape.
  • The effect millennial preferences are having on the multifamily market.
  • The biggest CRE trend in South Florida in 2020.

 

 

Source:  SFBJ