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Industrial: Flood of Capital, Big Portfolio Deals & Hot Markets
Industrial real estate remains a hot product type for both occupiers and investors. Connect Media asked Colliers International’s Michael Kendall to share what’s driving the sector today in our latest 3 CRE Q&A.
Q: How are strong market fundamentals and the continued flood of capital affecting the industrial property sector?
A: The strong market fundamentals and continued flood of capital is keeping capitalization rates (cap rates) at historically low levels, even with the recent rise in interest rates. With industrial continuing to be the product type of choice for most investors, and a continued lack of quality properties on the market to sell, demand continues to outstrip supply and bidding is very competitive. This is forcing many investors to submit unsolicited offers, hoping to avoid the bidding process. Cap rates are at unprecedented lows, and each new transaction seems to set a new record for price per square foot, particularly in most infill coastal markets and strong secondary markets.
Q: There were some big portfolio trades recently (Prologis/DCT and Blackstone/Gramercy). What has been the impact on sales volumes?
A: With the wall of capital targeting the industrial sector, coupled with the exceptionally strong market fundamentals and the recent pullback in REIT share performance, some well-capitalized groups, such as Prologis and Blackstone, have capitalized on this moment in time, and made big bets that the market capitalizations of these REITs are under-valued relative to their underlying asset values. When these mega-transactions were announced in the first half of 2018, sales volumes spiked significantly compared with the same time period in 2017. Scale continues to be the name of the game, with larger portfolios commanding portfolio premiums over single asset values.
Q: Is absorption keeping up with increased new deliveries of industrial product? Where are the hottest markets? Are there any markets of concern?
A: Thus far, absorption has continued to keep pace with new deliveries, keeping vacancy levels at historically low levels. The markets that have the most barriers to entry (the four corners of the U.S. – Southern California, Seattle, New York/New Jersey and South Florida) are expected to continue this trend of a healthy balance between deliveries and absorption through 2018 and into 2019. Some of the hottest markets from an absorption standpoint are currently the Inland Empire in California, Dallas, Chicago, Atlanta and Central Pennsylvania. Investors will keep a watchful eye on these markets, looking for any sign that absorption might be slowing down. So far, that doesn’t appear to be happening.
For comments, questions or concerns, please contact Dennis Kaiser
- ◦Development
- ◦Sale/Acquisition
