At a time when most commercial property sectors are plateauing or declining in terms of rents, net space absorption and vacancy rates, industrial properties are in the midst of a heyday. Real estate services company Cushman & Wakefield said average lease rates for U.S. industrial properties hit a record high of $5.80 per square foot this past third quarter, a 4.1 percent year-over-year increase. Meanwhile, the nationwide vacancy rate of 5.1 percent was a historic low, Cushman & Wakefield said.
Commercial mortgage brokers and their investor clients should be able to keep relying on the industrial sector throughout 2018. That’s one of the messages that John Morris, executive managing director of logistics and industrial services at Cushman & Wakefield, conveyed when he spoke recently with Scotsman Guide.
How would you describe the current climate around the U.S. industrial-property market?
My perspective on the overall market is incredibly optimistic. … At the end of , this market will be up from the prior cycle, [although] not as good as the last three. But it’ll still be one of the five best net-absorption years in industrial/commercial real estate history.
Let’s call it a slower-growth economy. Maybe there’s some uncertainty out there. I think that, for a lot of the major players, they’ve taken on much of the space they need. But at the same time, I tend to think it’s more about decision cycles being a little bit slower. When e-commerce was strictly a new phenomenon for the mass market, many tenants were taking on space as quickly as they could, trying to be responsive. … But I think now, a lot of people are being a little more deliberate with their optimal solutions. That’s a good thing. They’re being even more strategic.
Will this strong market for industrial properties continue into the foreseeable future?
For four or five years in a row, people in the business — some of our people included — have been saying that [capitalization] rates would bottom out this year and start to rise next year. [Cap rates are a measure of return on investment and generally are inversely correlated with property values.] And it just hasn’t happened. So, I’m really not going to sit here and say, “The cap rates are definitely going to rise [this] year,” because that is a little bit of a broken record and continues to be proven wrong.
I think we’ve hit what are really rational floors in cap rates in some core industrial markets. The cap rates in the high 3s in Southern California, you’re talking about assets that are performing almost like bonds at that kind of a return level. … At some point, if it’s really difficult to get yield out of industrial assets, obviously capital will find somewhere to find yield. But I think pricing has probably hit some kind of a floor and will probably remain stable in the near term.
Which areas of the country should brokers be most aware of in terms of investment opportunities?
Growth has been healthy in all of the core markets. That really is driven by two things: First of all, core markets are less volatile, so when you invest your capital in a core market, there’s less downside risk, for sure. Of course, pricing is higher in core markets, but it’s a safer asset play.
Los Angeles, Dallas, Atlanta, Chicago, New York City, New Jersey, Miami, Philadelphia, those are the core markets that have done well and will continue to do well. … Places like Greenville [South Carolina], Charlotte [North Carolina], San Antonio, Salt Lake City, Nashville [Tennessee], Orlando [Florida] — all of those markets have performed well because they are stable and primarily Sun Belt markets where population growth is strong, and where the institutional-capital environment is not quite as competitive.
Should U.S.-based brokers and investors be concerned about competition from foreign investors?
Investing is really about three things. It’s about the availability of capital in place. It’s about the availability of product in the market, where you can get a reasonable yield. And it’s about market expertise. So, what we have seen foreign capital work very hard at understanding better [and gaining] in the last couple of years is market expertise.
It’s nothing to be fearful of, by any means, but I definitely think that foreign capital is in this market and will remain in this market. And one can expect that they’ll become even stronger players as time goes by.