Carlsbad CA— U.S. industrial investment is expected to continue at a steady pace into 2020, although headwinds created by tariffs and a slowing economy are beginning to gain steam, according to a new RCM-SIOR Industrial Investor Sentiment Report.
Investors are shifting strategies, however, to find safe havens against any market slowdown. Some investors are adjusting their portfolios toward land-constrained markets that provide the potential for higher rent growth. Among those strong markets are Seattle, Miami, Northern New Jersey, and parts of Southern California. Other investors are moving back to core markets to minimize risk or are focusing on secondary markets where further cap rate compression is more likely, according to the report.
“Investors are projecting a steady flow of industrial activity in the U.S. for the foreseeable future, given the strong fundamentals and the stability this sector offers,” says Steve Shanahan, Executive Managing Director, RCM, a part of LightBox. “Investors are keenly aware of the potential for an economic slowdown but are focused on the long-term horizon and taking the steps necessary to protect their investments.”
The RCM-SIOR Report aggregated insights and perspectives from industrial market experts—investors, developers and brokers—across the country. The report shows that industry experts are thinking more strategically about their investments and decisions but are not pulling back from the industrial sector.
“We definitely find ourselves at a very interesting point. As we look ahead and evaluate a softening in the market, we can still expect strong demand to continue for the foreseeable future,” says outgoing SIOR President Robert G. Thornburgh, SIOR, CCIM, a Regional President for Kidder Matthews, based in the company’s El Segundo, CA office. “Further down the road, the corresponding rise in values, construction, labor and talks of a recession – while not new topics – could clearly develop into sizeable headwinds.”
Key survey responses
The RCM-SIOR report was based on surveys and interviews that tracked participants’ perceptions of investment activity, pricing, perceived threats and opportunities, and cap rates. Responses underscore the sentiment that the market remains on solid footing, even if there is a slight tempering of enthusiasm. Among the findings are:
- Investment Activity—E-commerce continues to reign as the top growth factor noted by survey respondents. 44% noted growth in e-commerce while 24% noted the amount of capital waiting to be placed in the market.
- Industrial Pricing—25% of respondents said pricing will increase by 5 percent or more over the next 12 to 18 months, down from 38% in 2018 and 34% in 2017. In the 2019 survey, 35% said pricing will increase by less than 5%, while 34% said pricing will stay the same.
- Cap Rates— Nearly 32% of participants in the RCM-SIOR report expect cap rates to compress further over the next 12 to 18 months. Since 2015, national average cap rates have compressed from 6.8% to a current level of 6.3%, according to data from Real Capital Analytics (RCA). Those rates are down to 4% to 5% in key markets, however, according to report participants.
E-commerce growth is key sustaining factor for the industrial sector
E-commerce, which is projected to grow by 10% per year, continues to be a transformational force in the industrial sector. While there is considerable activity from more traditional manufacturing, packaging, and related tenants, the buzz that e-commerce creates is difficult to overlook.
“The significant expansion in e-commerce and the ongoing need for realignment of the corporate supply chain continues to shape the industrial sector and helps position it as a top asset class for investors, now and moving forward,” says Tina Lichens, Chief Operating Officer of RCM. “There is also a significant push to tap into consumers in large, urban population pools, which is driving considerable warehouse and distribution activity.”
Construction still active and driving investment pipeline
The U.S. industrial market has seen significant construction during the past five to seven years, as developers look to fill demand from tenants seeking modern space. Markets such as California’s Inland Empire, along with Dallas, Chicago, and others have seen millions of square feet of new buildings hit the market, with steady leasing following suit.
While development has been tempered by a balanced lending environment, there are some markets where overbuilding is a perceived concern. In this year’s report, 51% of the survey respondents noted being somewhat concerned about overbuilding, compared with 33% saying they were not concerned at all. Some report respondents noted the continued need for new development in some markets, however, given the low vacancy rates and strong tenant demand.
Economic and non-economic concerns posing threats
The report also notes that brokers and investors are concerned about the ongoing disruption from tariffs and escalating trade wars, which they say cause volatility and increased costs. Closer to home, experts say the ongoing labor shortage—both for workers in general and for those with specific manufacturing, computer and related skills—is having ripple effects throughout the U.S.
According to the report, the greatest non-economic threat to the industrial market is equally balanced between lack of supply of quality assets and unrealistic seller expectations and, to a lesser degree, overbuilding or oversupply. Given the volume of product that has traded over the last several years, investors have been consistent in the RCM-SIOR survey in citing lack of supply as a concern. Concern about unrealistic seller expectations has been on the rise, as sales activity has continued at a steady pace.
Markets to Watch in 2020
Heading toward 2020, many investors surveyed and interviewed for this report said that industrial activity will continue to be strong in core markets, such as the Inland Empire, Dallas, Chicago, and Northern New Jersey. Coastal markets, particularly those that tie into port activity, such as Los Angeles and Miami, are also expected to perform well due to the limited potential for further development.
Also, markets with a strong business climate, a growing population base and solid logistics infrastructure are on the radar of investors. States with reasonable regulatory oversight and legislation, such as Arizona, Nevada, Texas, Florida and Tennessee, also are viewed favorably.
In summing up the global influence of e-commerce and need to evaluate each market’s characteristics, incoming SIOR Global President Mark J. Duclos, SIOR, CRE, President of Sentry Commercial, says “E-commerce has brought a globalized focus to this sector, and may be a constant thread across the country, but the majority of markets also are driven by the local market users’ needs and economic considerations.”
To download a copy of the 2019 RCM-SIOR Industrial Investor Sentiment Report, click here.