Industrial investment is expected to continue its healthy run into 2018, as strong leasing, construction and investment sales fuel the market, according to a recent Real Capital Markets/SIOR investment sentiment report.
A landslide number of investors and brokers locally and across the country believe investment levels will at least stay the same, with many predicting a slight increase in activity. The report shows that 90.3 percent of brokers and investors believe investment activity will remain comparable to recent levels, with 47.8 percent saying activity will increase, even if only nominally.
"The industrial sector continues to draw a wide range of investors, due to its stability and the potential for long-term growth," said Steve Shanahan, executive managing director, RCM. "That equilibrium and other market dynamics make industrial investment properties the preferred option among a wide range of investors. We don't foresee a dramatic shift in the near term."
This industrial cycle, and the record expansion in leasing, construction and capital market sales, has been striking in its longevity, he said. Investment sales volume has been strong since 2011, with demand outstripping supply in many core markets. According to those surveyed, there is no end in sight, perhaps for at least 12-18 months.
In September 2017, RCM and SIOR surveyed their databases of industrial property investors and brokers to gauge investment sentiments, the greatest threats to the industry, the factors most influencing their acquisition decisions and where they see the greatest opportunities. Highlights of the study, released in late October, include:
Greatest impact: E-commerce or general business growth?
Respondents in the survey were asked to identify specific factors that were having the greatest impact on industrial investment activity. Overall, 37.4 percent identified e-commerce as having the greatest impact followed by the general strength of the economy at 34.5 percent.
Some participants adopted the attitude that "as e-commerce goes, so goes the industrial market." Yet others noted that the strength and success of the market cannot be placed solely on any single economic factor.
Geoffrey Kasselman, executive managing director for SIOR, believes the importance of e-commerce, and specifically the way Amazon is changing the marketplace, cannot be overstated.
"Everyone needs an Amazon strategy," said Kasselman, an industrial practice leader of Newmark Knight Frank in Chicago. "If you are considering a particular property, you need to assume that Amazon wants it too, and may outbid you for it. If you are located near an Amazon facility, there could be significant competition for labor, and it too could cost you more than you think. If that isn't enough, are you partnering with them, using their data services, or are they coming for your industry next?"
"E-commerce definitely has played a role in the dynamic run of 30 consecutive quarters of positive absorption in the U.S.," said Scott McKibben, chief investment officer of Rosemont-based Brennan Investment Group. "But, we have to be careful to not overemphasize its role, because it is not solely responsible for the success of the industrial market."
No single greatest threat, but plenty of options
Investors and brokers agreed that the greatest threats to prolonged strength in the industrial investment arena include overbuilding and oversupply, the lack of quality assets for investing and unrealistic seller expectations. Yet there was little agreement in the order of importance. For investors, the top threats were overbuilding (40.6 percent), unrealistic seller expectations (22.9 percent) and lack of supply of quality assets (17.7 percent). Brokers ranked lack of quality supply first (46.4 percent) followed by unrealistic seller expectations (14.6 percent).
Respondents also addressed activity across key submarkets, pricing expectations, and how the political climate might influence industrial investment activity into 2018.
Brennan's Scott McKibben said other key contributors include the robust housing industry (specifically multifamily), the comeback of the auto industry (both of which have long supply chains), and the "onshoring" of industrial manufacturing back to the U.S.
The impact of a strong auto industry, for example, is not just being seen in Detroit, but also in markets such as South Carolina, and Nevada, where BMWs and Teslas, respectively, are being manufactured. McKibben noted that the United State saw a net gain of over 200 manufacturers moving into the United States in 2016 and he expects that number to be even larger in 2017. Part of Brennan's portfolio include 200 manufacturing buildings in 25 states.
"Manufacturing is a much bigger driver than people realize," McKibben said, noting that increasing use of robotics in many manufacturing applications have replaced some low paying jobs. Those savings, combined with lower transportation costs, are helping to drive manufacturers back to U.S. shores.
Beauty and opportunity, is in the eye of the beholder
Buoyed primarily by investors' preference, mid-size, modern, multi-tenant properties are currently viewed as the most attractive investment opportunity, with over one third (35.8 percent) of all respondents selecting those types of properties. For principals, mid-size, multi-tenant facilities are favored at a rate of 2:1 over infill development opportunities, followed closely by newly-built high-cube distribution facilities.
Increasingly, according to industrial professionals, investors are becoming more and more tolerant of rent rollover. Where vacancy and rent rollover were once taboo, investors now see an opportunity to increase rents and improve NOI therefore enhancing value.
In the survey, infill development and mid-size single tenant facilities were viewed similarly. One broker, however, suggested that infill may be more talk than opportunity saying that some use the term simply to portray greater importance for a fringe suburban location.
Industrial assets: pricing them right
Pricing of industrial assets has been strong for several years and is at record levels in some core markets. The study found that principals and brokers believe pricing has not yet plateaued, though it may be on the horizon. Like the prognosis for investment activity levels, an overwhelming majority -- 92.7 percent -- of principals and brokers believe pricing will at least stay the same, with 33.8 percent anticipating increases of as much as five percent or more.
Capping cap rate compression?
Though there is great optimism in virtually all aspects of industrial investment metrics -- activity levels and pricing -- the expectations for further cap rate compression are more tempered. More than 17 percent of principals and brokers believe there could be some level of compression in the next 12-18 months. The vast majority, however, believe that cap rates will either remain the same (46.9 percent) or increase slightly (34.8 percent). One investor suggested the market has "reached the upper limits of pricing" and expressed "surprise by any meaningful compression in cap rates".
According to the findings of the RCM-SIOR Industrial Investment Sentiment Report, and supported by a series of in-depth interviews with principals and brokers, the current state of the market is as good as it has been in perhaps as many as 30 or more years.