U.S. Industrial Market Set to Take Off

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It may be the least glamorous of the commercial real estate sectors, but the U.S. industrial market is set to shine in the near future and will prove a popular destination for investors’ dollars.

My guests on the “Commercial Real Estate Show” shared those observations and others in a thorough update on the market. We discussed sector fundamentals, investment sales activity, tenant attitudes, spec development and more.

Nationally, the industrial real estate market has experienced seven consecutive quarters of positive net absorption, noted Mike Felton, vice president, corporate industrial services, for Bull Realty. In 2011, the national vacancy rate declined from 10 percent to 9.5 percent.

Mitch Roschelle, Partner, PWC

Mitch Roschelle, a partner with PricewaterhouseCoopers, said 2012 will be “a transition point” from the recent recession to a period of rent growth and new development. 2013 and 2014 will feature “a mini-explosion in the expansion of the sector,” he said.

Fortunately, developers have not recklessly added new space in recent years, Roschelle noted. “I think that is setting us up for something good, which is a rebound in the sector,” he said.

Investment sales also will pick up steam in the year ahead, Roschelle predicted. “It’s a neat little niche in the commercial real estate sector that often gets overlooked because it’s not as sexy as some of the other property types but it’s got a great yield, and I think that’s going to be the catalyst for a big pickup in transaction volume, starting in 2012 and continuing thereafter,” he added.

I agreed it will be a favored asset class moving forward.

“We’re definitely bullish,” said Doug Smith, senior vice president for Seefried Properties, when I asked him about his view on the sector’s performance moving forward. “We think 2012 is going to be a good year and [2013 to 2016] really good years.”

Feeling Better

Tenants are finally exhibiting at least some increased confidence, said Ralph Kittrell, a principal with Exceter Property Group. “Being somewhat optimistic but being careful is the best way to put,” he said.

“I would echo that … For every deal that’s got a right of first offer on a space that’s adjacent to them, it’s also got a termination option on what they’ve actually got under lease, so they’re looking to get out on both sides,” Smith said.

Kittrell said his company is starting to see some demand for smaller deals. “I think that’s good because the smaller companies are starting to see some growth and coming back into the market,” he said.

Cap Rates

Mike Felton, CCIM, V.P., Corporate Industrial Services

Cap rates in the industrial sector are averaging about 8.25 percent nationally, Felton noted. “That’s down from last year, which was closer to 9 [percent], so we’re on the positive side of things,” he said.

Kittrell said his firm is seeing cap rates below 6 percent for core industrial real estate in Miami and the Inland Empire. The rates for such properties in Atlanta and the Midwest are around 6.75 percent and 7.5 percent, respectively, he observed.

“We are seeing some cap rate compression,” Kittrell said. “There’s a lot of demand out there for core real estate.”

Spec Development

Approximately 40 percent of the 32 million square feet of industrial space under construction is spec development, Smith noted. In the near future, such development “is going to be spotty, and it’s going to be in specific markets where there’s some real drivers to convince folks to go spec, whether it’s in Florida or [Southern California’s] Inland Empire, Houston, and around some of the airports.”

To learn more about the U.S. industrial market, you’re invited to hear the show, which is available for download here.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show

President, Bull Realty, Inc
800-408-2855 ext 2001