U.S. Industrial Sector Shows Improvement & Attracts Considerable Investor Interest
As 2012 begins to draw to a close, the U.S. industrial real estate market’s fundamentals continue to slowly improve while investors continue to show considerable interest in the sector.
On a recent episode of “America’s Commercial Real Estate Show,” my guests and I provided an enlightening update on the sector. Among the topics we covered were vacancy rates, absorption, investor demand, e-commerce, environmentally friendly development and new construction trends.
Crunching the Data
The national industrial vacancy rate fell about 20 basis points to 8.7 percent during third quarter 2012, according to Rene Circ, director of research at PPR, a CoStar company.
Meanwhile, national net absorption was a positive 15 million square feet during the third quarter. That number didn’t exactly blow Circ away, but he did note a silver lining: this time two years ago, the industrial sector was still experiencing negative absorption.
“We’re climbing,” Circ said. “We’re just climbing very slowly.”
Investment sales in the sector, on the other hand, are brisk, totaling about $4.8 billion in the third quarter, Circ said. “The industrial investor market didn’t get the election memo,” he joked. “It did not slow. In fact, it’s back to normal, if you consider the years 2005 and 2006 as normal.”
Circ also noted that we’re in the midst of a subtle change in investor taste. Buyers have long been fixated on core, Class A sites in gateway markets, but now they’re interested in the same kinds of facilities in secondary markets -- such as Indianapolis, central Pennsylvania and Phoenix -- where the cap rates aren’t as compressed, he said.
“It’s still about buying the best stuff, but it’s no longer just about buying it in the best markets,” Circ said. “In some cases, the secondary markets will do just fine.”
The Two E’s: E-commerce and Environmentalism
The development of distribution centers for e-commerce “is a new and big trend,” said Sim Doughtie, president of King Industrial Realty Inc. Best Buy, The Home Depot and Bed Bath & Beyond are some of the retailers that have recently announced plans to build more e-commerce distribution centers, he added.
The development of “green” industrial properties that can achieve LEED or some other type of environmental certification is another prevalent trend in the sector, guests noted. For starters, users now demand such buildings. “As a landlord, I wouldn’t want to own [an industrial] building 10 years from now that’s not LEED-certified because I wouldn’t want to try and sell it,” said John Petricola, regional director of Rockefeller Group Development Corp. “I don’t believe the market will be there.”
While developers and landlords used to be scared off by the cost of building industrial sites that incorporated lots of environmentally friendly features, they have now discovered that the features don’t really add much to the overall development costs and also have seen that they can pave the way for operational savings over the course of a building’s lifetime.
The overwhelming majority of the disciplined new construction taking place in the sector consists of build-to-suit properties, noted Todd Carter, regional vice president of DCT Industrial. “There’s simply not a lot of spec development out there,” he said.
“The rents haven’t really justified spec development just yet,” Petricola added. “Rents have been relatively flat for a number of years. If the rents aren’t there, disciplined developers won’t build [spec].”
“If you’re looking at L.A., Houston or Indianapolis, those are tight markets, so you will see some spec development there,” Doughtie said. “But if you’re in Chicago or Atlanta, you’re just not going to see it.”
New construction has largely been fueled by firms’ desire to reconfigure their supply chains to minimize transportation costs, Circ also noted. “It’s about finding locations where the end user is served more quickly at a lower cost,” he said.
The Return of Manufacturing
One large reason for optimism about industrial real estate’s continuing recovery is the return of manufacturing to U.S. soil. “I would definitely say we’re having a manufacturing renaissance in America,” said Bob Pertierra, vice president, supply chain and advanced manufacturing, at the Metro Atlanta Chamber of Commerce. Rising employee wages in China and an abundance of cheap natural gas in this country are two of the reasons the United States is becoming an ever-more popular market for foreign manufacturers, he said.
“We’ve had a lot of movement here from countries like Germany, Japan and Korea,” Doughtie added. “It’s really [been noticeable] in the heavy-equipment field – tractors, automobiles, that kind of thing.”
While I had such distinguished guests in the studio, I asked them for tips for our listeners.
Todd Carter, a regional vice president with DCT with 20-plus years experience in the industry, including previous leadership positions with Majestic and ProLogis, ended the show with some well thought out advice: “buy low and sell high.”
As we say on the show -- lead, learn and laugh.
President, Bull Realty, Inc