Industrial Capital Market Update, Q3 2018

Industrial Market: National Cap Rate Trends

 

 

The industrial sector has garnered significant investor interest over the last year, given the expansion of e-commerce and warehouse/distribution space.  Here we show how industrial cap rates had been volatile from 2013 through 2016, but have trended downward in the last two years (shown in the red line representing the 12-month rolling average). In the third quarter, the average industrial cap rate fell to 7.15% from 7.23%. The 12-month rolling average fell to 7.3% from 7.4% last quarter. This cap rate decline defies the conventional wisdom that cap rates increase with interest rates – however, it is indicative of the general investor interest in industrial properties.  I should mention, however, that following a strong year in 2017, both the occupancy growth and rent growth for industrial properties subsided considerably in the first half of 2018. That said, the industrial market did see healthier growth in the third quarter. The average effective rent grew 0.8% in the quarter, up from 0.6% in the two previous quarters.  Tenants may have hesitated a bit in the first half to lease space, considering the uncertainty in global trade talks.

 

Industrial Market: National Sales Volume Trends

 

 

Looking at industrial transaction data, we see a very interesting pattern: industrial sales volume has increased significantly in the top 10 metros but less so in the other 40 metros. The top 10 metros include Chicago, Atlanta, LA, San Jose and Seattle where interest is high.  San Bernardino-Riverside, which is in the “other 40” metros, had seen strong industrial sales volume growth in 2017, but volume fell a bit in the last two quarters. As this chart shows, volume is very volatile.  This volatility trend should continue as the impact of the potential trade war continues to affect the industrial sector.

 


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.