Industrial real estate has consistently been a well-performing asset class for commercial property investors. Capital continues to remain hungry for industrial real estate—many funds are under-allocated in the sector—due to its consistently strong performance, versus alternative investments in the marketplace.
Looking ahead at activity in 2018, here are some trends my team and I are seeing:
Pricing and Cap Rates: Traditionally, the most aggressive industrial investors have focused on port markets on the West and East Coasts. As pricing continues to increase, many are shifting their focus to more inland markets, such as Dallas-Fort Worth, Chicago, and Atlanta.
Capital has continued to flow into industrial, which has compressed spreads for both Class A and B assets. In major industrial markets, there traditionally has been roughly a 125 basis point (bps) differential in cap rates for Class A versus B properties. Recently, that spread has begun to compress to less than 90 bps, as more investors target the product type. On the West Coast, spreads have begun to compress to less than 50 bps. This is pushing investors seeking yield to look at secondary and tertiary markets like Austin, Denver, and Salt Lake City.
ecommerce: The most significant trend driving industrial demand continues to be the proliferation of ecommerce retail. Amazon, which generated a whopping $113 billion in revenue last year, is by far the market leader. Walmart ($23.5 billion in revenue) continues to pour capital into its ecommerce presence, as do online retailers like Wayfair ($5 billion in revenue), which have no brick-and-mortar locations.
Last year, Cushman & Wakefield launched a “newCommerce” platform that connects our retail services group with our logistics, industrial, and ecommerce expertise. With the new models and expectations for retailing and fulfillment, we believe this sector is just going to continue to grow. In addition to more retail stores and big distribution hubs, consumer goods companies are realigning their supply chains to include additional smaller, infill hubs that are closer to end customers.
U.S. Market: For the last five years, U.S. industrial net absorption has outpaced U.S. GDP (as a percentage of inventory), with a 100+ bps spread as of 2017. National vacancy rates, which currently stand at 5.5 percent, remain well below the 10-year national average of 8 percent. Due to the squeeze on available space, industrial rents continue to rise.
DFW Market: Dallas-Fort Worth remains a target market for tenants seeking distribution hubs, due to its central location, access to major thoroughfares, and significant local population. This is apparent in the statistics, which show the market absorbing nearly 26 million square feet of space, setting pace a new record for the third consecutive year and keeping pace with the 27.4 million square feet in new development.
More than 90 percent of new construction in DFW last year was speculative. Due to brisk leasing activity, however, overall vacancy saw only a small, 10 bps increase. Most new development is occurring in South Dallas, where land has been more readily available. Construction is expected to slow in 2018, due to a lack availability of developable sites, even in the southern sector. This will further compress vacancy rates and, in turn, drive rent growth. Average lease rates at the end of Q1 2018 were $5.40 per square foot (psf), an impressive 8.9 percent jump compared to Q1 2017 ($4.96 psf).
Given its solid market fundamentals, and strong local and state economy, there’s no question that DFW will remain a favored market for industrial real estate investors for the foreseeable future.
Jud Clements is an executive managing director within Cushman & Wakefield’s capital markets group, specializing in industrial real estate. Contact him at [email protected]