Industrial Real Estate ’17: Continued Growth
Industrial real estate pros expect the sector to continue posting solid results for developers and investors.
Last month, NREI (National Real Estate Investor) released the results of it’s third annual survey of the industrial real estate sector. Year-over-year comparisons reveal where outlooks changed and where they haven’t. Many respondents expect continued improvements in occupancy rates and rents. Here’s what you need to know:
Cap Rates Will Rise
For the first time in the NREI survey’s history, the majority of respondents expect industrial real estate cap rates to rise. In the past two surveys conducted by NREI respondents noted cap rate compression. In this year’s survey, the average cap rate came in at 6.1 percent, compared to 6.4 percent in 2016 and 7.1 percent in 2015.
In this year’s survey, 58 percent of respondents expect an increase, while 27 percent expect no change and only 17 percent expect to see further decreases.
Equity & Debt Availability Will Remain Steady
As it relates to equity, 52 percent of participants responded that the availability of capital was unchanged from a year ago, 28 percent said capital was more widely available, meanwhile 10 percent said they were unsure. Similar numbers were received regarding debt. 53 percent said debt availability was unchanged, 23 percent said it was widely available, 16 percent said it was less available, and 8 percent said they were unsure.
Participants were asked how they expect various lending factors to change in 2017. 88 percent responded that they expect interest rate increases and 44 percent responded that they expect a rise in the risk premium. As far as loan-to-value ratios and debt service coverage ratios, respondents don’t expect much change. As that translates to investment activity, 55 percent of respondents said they plan to hold in the sector in the next 12 months. Only 13 percent plan to sell, while 33 percent are looking to buy.
Build Baby, Build
The outlook among survey respondents is that the level of development is about right for the sector, and there is very little fear that too much space is being built. 58 percent of respondents feel that the level of development is the right amount (probably developers), 21 percent feel there is too little development occurring (probably builders and architects), only 11 percent said too much development is taking place (probably the EPA), and the remaining respondents said they were unsure (probably politicians).
According to a Cushman & Wakefield report, 232.9 million sq. ft. of industrial product was delivered in 2016. Currently, there is an additional 215.6 million sq. ft. of industrial product under construction. NAI Global reports that 15 markets saw net absorption increase, 13 saw construction rise, and 19 experienced increases in asking rental rates; Overall, 10 markets saw increases in all three. In addition, 19 markets recorded positive absorption, with 14 also seeing drops in vacancy, indicating a national trend for industrial space surpassing supply.
Survey participants were also asked to estimate how much additional supply their markets could absorb: 72 percent said their markets could absorb additional supply equal to between 5 and 19 percent of current inventory. 12 percent estimate the market can absorb new supply equal to 25 percent or more of current inventory. Experts at Kima Commercial are reporting a demand for additional supply, in some cases speculative in nature. As a result, another factor affecting supply in some markets is the conversion of old industrial boxes into other uses. Overall, 70 percent of respondents said this activity is taking place in their markets. Kima experts have witnessed this in Raleigh-Durham and several of the surrounding rural markets where large old industrial boxes are common and available.
As of January 2017, the industrial sector has registered 27 consecutive quarters of net occupancy gains. It is among the strongest three-year periods on records, the most recent of comparison took place from 1997 to 1999. Industrial real estate professionals nationwide expect further gains in 2017. The national industrial vacancy rate for all product types continued to decline in the fourth quarter of 2016 and U.S. industrial asking rents have increased.
Given the information gathered by NREI and what Kima Commercial’s experts are reporting at the local level, it is safe to conclude that most will remain bullish on the industrial real estate sector. It is also important to note that when respondents to NREI’s survey were asked to rank the relative strength of their regions the South ranked second behind the West.
Earlier this year Kima Commerical brokered a historic land transaction in Youngsville, North Carolina for industrial development. The project consists of a 365,000 SF warehouse and manufacturing facility for K-Flex USA, an international manufacturer of elastomeric foam rubber.