Industrial Real Estate Becoming More Popular

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As the economy is slowly gaining traction, so too is the U.S. industrial real estate market. Tenant demand is improving and the sector’s fundamentals have improved enough to catch the eye of investors.

Those were two of the points made on “America’s Commercial Real Estate Show,” which provided an in-depth look at the industrial market’s performance in first-quarter 2012.

Ryan Severino, Senior Economist, Reis

In the first quarter the R&D/flex component of the market experienced a 20-basis-point decline in its vacancy rate, while the warehouse/distribution subsector’s vacancy rate dipped by 10 basis points, said Ryan Severino, a senior economist for Reis.

While the investment sales in the sector dipped slightly in the first quarter when compared with the last three months of last year, the transaction volume was 21 percent higher than in the same period in 2011, Severino added. 2012’s sales volume should end up higher than 2011’s, and sales will likely continue to grow in the years ahead, he said.

“I think this is one property type that’s been a little bit overlooked the last couple of years, but we’re starting to see more and more investors pay attention to,” Severino noted. I agree we are seeing an increase in demand for industrial properties.

I asked Ryan about the trends and his forecast for the sector moving forward. “It was another quarter of what I would characterize as modest improvement in the industrial sector …,” Severino concluded. “I say that we should be cautiously optimistic about the sector [in the year ahead].”

On a lighter note, while he was looking into the shows crystal ball, I asked Severino for a prediction on who will win the NBA playoffs. His answer? Miami.

Stage Is Set for Rent Growth

A lack of new supply in recent years has the sector set for significant rent increases in the future, said Mitch Roschelle, who heads PricewaterhouseCoopers’ Real Estate Advisory Practice. Also driving rent growth is tenants’ growing reluctance to move and disrupt the efficient operations they’ve established, he added.

To move “and run the risk that this finely tuned machine that’s been productive and profitable taking a hiccup … it doesn’t make sense, and so [tenants would] rather stay put,” Roschelle said.

Greg Herren, COO, Seefried Industrial Properties

While fundamentals continue to improve, the industrial sector is not yet a market that favors landlords, said Greg Herren, COO of Seefried Industrial Properties. However, “as they enter the market, I don’t think tenants should expect grossly discounted deals,” he said.

Still, tenants are demanding lots of options in their leases, Herren observed. “They want options to expand and in the same breath, they want options to terminate,” he said. “They want an option to purchase and in the same breath, they want an option to take the guy’s space next door.”

Not Ready for Spec

Despite the sector’s improved performance, developers are not confident about undertaking spec projects, my guests noted. “There is some spec development in Miami, in Southern California, and I understand that one of the large national developers has commenced a bulk development in south Dallas, but generally speaking … the improvement in rental metrics is not yet recommending to developers that spec development is ready,” Herren said.

Markets of Note

Port areas and big distribution cities like Chicago and Dallas are the markets of most interest to investors, Severino said.

Meanwhile, Albuquerque, N.M.; Denver; and Salt Lake City are three industrial markets experiencing notable recoveries, while Dallas; Nashville, Tenn.; and Orlando, Fla., are three that continue to struggle, according to Roschelle.

You’re invited to hear more on the U.S. industrial real estate market including a video of the PwC portion of the show.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show

President, Bull Realty, Inc