Industrial Market: National Cap Rate Trends
The industrial sector has captured significant investor interest over the last year given the expansion of e-commerce and warehouse/distribution space. The chart below shows how industrial cap rates had been volatile over the last few quarters, but the mean cap rate increased twenty basis points to 7.3% in the second quarter from a recent low of 7.1% in the first. The red line representing the 12-month rolling average shows a clear downward trend in 2017, but the average has held steady at 7.4% for the last four quarters. This flat rolling average cap rate trend (defying conventional wisdom that cap rates increase with interest rates) is indicative of the general investor interest in industrial properties.
It should be mentioned, however, that following a strong year in 2017 for both occupancy growth and rent growth, net absorption for industrial properties subsided considerably in recent quarters, as tenants may have hesitated a bit to lease space given the uncertainty in global trade talks. Switching back to the transaction data, it should also be mentioned that sales volume in industrial increased 9% in the second quarter, unlike all of the other property types that had a decline in sales volume. Industrial sales volume was also 3% higher than in the second quarter of 2017. This suggests that investor interest is high despite the slowdown in occupancy growth.
By region, the cap rates did not show as much disparity. The West had the lowest cap rate at 6.8% and the Southwest once again had the highest at 9.1%. The Southwest has repeatedly seen the most volatility. The Midwest and the Northeast regions have had less volatility; cap rates were 7.9% in the Midwest and 8.0% in the Northeast in the second quarter.