Industrial Capital Market Update, Q1 2019

National Cap Rate Trends


National Industrial Market: Cap Rate Trends, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


The Industrial sector has garnered significant investor interest over the last two years given the expansion of e-commerce and Warehouse/Distribution space. The chart above shows how industrial cap rates had been volatile from 2013 through 2016 but have trended downward in the last two years, as shown in the orange line representing the 12-month rolling average. In the first quarter, the average industrial cap rate fell to 7.2% from 7.3% in the fourth quarter, but it was higher than the recent low of 7.1% in the first quarter of 2018. The 12-month rolling average was unchanged at 7.2% in the quarter. This steady cap rate decline like the one for the apartment market defies the conventional wisdom that cap rates increase with interest rates. It is, however, indicative of the general investor interest in industrial properties given the fundamentals we saw in this asset class in recent quarters.

The Warehouse/Distribution and Flex/R&D property markets both underperformed in the first quarter after a strong second half of 2018. The industrial sector started to slow in the first half of 2018 after a solid 2017. The average effective rent grew 0.6% in the quarter, down from a high of 1.0% in the third quarter of 2018, but consistent with rent growth in the first two quarters of 2018.

Investors have clearly been spooked by the threat of a trade war, as the U.S. followed through on its threat and imposed new tariffs on $200 billion worth of goods. China has in turn retaliated with tariffs on $60 billion of U.S goods. Additionally, tenants may have hesitated in the first quarter to lease space given the uncertainty in global trade talks.


Average Price per SF


National Industrial Market: Average Price per SF, 2014 – 2019 

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above, showing average sales prices per square foot, isolates the west coast metros, which include all the California metros as well as Portland, Oregon, and Seattle. Note how the west coast sales price has trended much higher than the other markets. This should not be a big surprise given how many properties there are in those markets, how large these properties are, and the fact that all of them are close to the ports. The top 50 line includes the east coast, Midwest, and southern markets. Both lines show that average sales prices have consistently trended higher over the last five years. There is noticeably less volatility in these trends than for the other property types.

The average price on the west coast increased in the first quarter to a record $190 per square foot, which was slightly higher than the recent high of $180 per square foot in the first quarter of 2018. The steadier upward trend in the dark blue line representing the top 50 metros is striking and is consistent with the declining cap rate.  In other words, the Warehouse/Distribution and Flex/R&D market continues to draw increasing investor interest.


Sales Volume


National Industrial Market: Indexed Transaction Volume, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above, depicting industrial sales volume, shows a similar pattern of volatility in transaction volume seen for the other property types. These sales volume numbers, however, are consistent with occupancy growth trends. Volume subsided in the first quarter just as occupancy growth had. Volume had soared in the third and fourth quarters of 2018, but the overall level is lower than at the end of 2017, when both the sales and occupancy numbers soared.

Analysis by Barbara Byrne Denham. Denham is a Senior Economist in the research and economics department at REIS, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.


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