The industrial market has been on a hot streak since 2012? Is it time for an inevitable slowdown? Or will the good times continue?
Brokers, it seems, lean toward the latter. And many of them have a warning for investors: Whatever you do in industrial real estate in the future, you need to have an Amazon strategy to deal with the growth and increasing reach of the online giant.
The majority of brokers who responded to a recent survey from Real Capital Markets and the Society of Industrial and Office Realtors said that investors will remain active – either at current levels or slightly elevated ones – in this commercial sector for the next 12 to 18 months. These same respondents said that e-commerce – and especially activity by Amazon – continues as the most important factor influencing this commercial sector, for both good and bad.
And that was just some of the most interesting news in the 2017 RCM Industrial Report.
The report found that 51.8 percent of commercial brokers surveyed said that they expect activity levels to increase in the industrial market during the next 12 to 18 months, even if only nominally. Another 39 percent said that they believe healthy activity will be the norm during this same period.
Survey respondents also said that they expect pricing to increase during the next 12 to 18 months, with many predicting a growth rate in prices of at least 5 percent. Some even said that they expect prices for industrial real estate to increase by as much as 10 percent.
Jack Fraker, with CBRE in Dallas, was quoted in the survey as saying that he doesn’t expect the industrial market to be as active as it was during the record-setting year of 2015. But he does expect industrial brokers to be plenty busy in the next year to year-and-a-half.
“Activity is at least on par with and will likely surpass 2007, the second-best year of all time for industrial investment,” Fraker said. “The fundamentals – absorption, vacancy and rent growth – are so compelling. I don’t see anything slowing down in 2018, not deal flow, fundamentals or the economics.”
According to Real Capital Markets, about nine in 10 of survey respondents agree with Fraker, saying that investment activity in industrial real estate will remain the same or rise in 2018.
Some CRE pros, though, are expressing caution. The industrial market has been strong for so long, it’s almost inevitable, they say, that there will be some slowdown in the near future.
“We expect activity levels will continue as they have been, but with a slight decrease in velocity,” said Andy Bennett, one of the founders of Biynah Industrial in Minneapolis. “For some, the psychology is that we are deep into the cycle, which creates a natural, cautionary outlook.”
Investors are also dealing with a lack of supply today in several markets. Scott McKibben, chief investment officer and managing principal with Brennan Investment Group in Chicago, said that Detroit is one Midwest market in which demand from investors is outpacing the amount of industrial supply available.
Even with the tight supply, though, McKibben said that he expects the industrial market to continue to draw plenty of investment dollars throughout 2018.
“This cycle feels different to me,” he said. “During the last cycle, it began to feel like the market had been sustained for too long. It doesn’t feel like that today.”
Respondents had good news when it came to industrial pricing, with 33.8 percent saying that they expected industrial prices to increase 5 percent or more during the next 12 to 18 months and 32.4 percent saying that they expected smaller increases of less than 5 percent. A total of 26.6 percent said that they expected industrial pricing to remain the same throughout 2018.
What factors are exerting the biggest boost on industrial activity today? No surprise, respondents cited the growth of e-commerce as one of the most important, with 37.4 percent pointing to this as having the single greatest impact on industrial investments.
Brokers and principals both told Real Capital Markets that they only expect e-commerce’s importance to grow. This is especially true as Amazon and other online giants push deeper into grocery deliveries and the overall “last-mile” segment of same- and next-day delieveries.
Geoffrey Kasselman of Newmark Knight Frank in Chicago said that the influence of e-commerce and, of course, Amazon, can’t be overstated in today’s industrial market. He said that investors and commercial real estate developers and brokers need to have a plan for dealing with Amazon’s influence.
“Everyone needs an Amazon strategy,” Kasselman said. “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 will be great 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?“
However, e-commerce isn’t the only factor influencing the market, respondents said.
“E-commerce definitely has played a role in the dynamic run of 30 consecutive quarters of positive absorption in the United States,” McKibben said. “But we have to be careful to not overemphasize its role, because it is not solely responsible for the success of the industrial market.”
Other contributors to industrial’s success today? Respondents pointed to the busy housing industry, especially multifamily; the comeback of the auto industry and the “onshoring” of industrial manufacturing back to the United States.