Industrial Capital Market Update, Q3 2019

National Cap Rate Trends

 

National Industrial Market: Cap Rate Trends, 2014 Q3 – 2019 Q3

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

 

The chart above shows cap rate trends in the Industrial sector which had seen significant investor interest in 2017 and 2018 given the expansion of e-commerce and warehouse/distribution space. Sentiments on this property type have shifted over the last two years, however, as the escalating trade war has raised concerns that the industrial sector could suffer significantly.

Here we show how industrial cap rates have been somewhat volatile since 2014, but the blue line showing the moving average has been flat for more than two years. After hitting the ten-year average of 7.7% in the second quarter, the average industrial cap rate fell to 7.4% in the third quarter. The 12-month rolling average also fell to 7.4%. Looking at the warehouse/distribution and Flex/R&D property markets, both held steady in the third quarter. The average effective rent grew 0.6% for warehouse/distribution and 0.7% for Flex/R&D.

Investors in this sector have clearly been concerned about the threat of a trade war which has been an ongoing saga. Especially this last month as talks seem to be making progress, but the media and the market know that without a signed deal, any rhetoric is meaningless. Of course, things change by the week, if not the day. Still, the ongoing uncertainty has clearly hurt the industrial sales market and could continue to do so.

 

Average Price per SF

 

National Industrial Market: Average Price per SF, 2013 – 2019 Q3

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

 

The chart above shows average sales prices per square foot. Note, however, that instead of separating the top 10 as we did for the other properties, we separate the west coast metros which include all the California metros, 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 there are and how large they are. Note how both lines show 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 that show high volatility.

The average price on the west coast declined ever so slightly in the third quarter from $195 per square foot to $187. For the top 50 metros, the average price declined from $131 to $117 per square foot. Both of these dips in average prices paid in the quarter is inconsistent with the drop in the cap rates, but remember that we are not able to generate a cap rate on every sale price, whereas these lines represent all the trades that qualify as warehouse/distribution or Flex/R&D. The biggest sale in the quarter was the sale-leaseback of an Albertsons distribution center in Irvine for $277 million or $233 per square foot. Also, in California, a 1.5 million-square-foot distribution center in Fontana near San Bernardino sold for $214 million or $143 per square foot.

 

Sales Volume

 

National Industrial Market: Indexed Transaction Volume, 2013 – 2019 Q3

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

 

Sales volume shows similar volatility in transaction volume as the other property types. In this case, industrial sales volume fell after spiking a bit in the second quarter. Volume for the top 50 metros shows a far more noticeable upward trend over the last year; however, volume in the west coast markets was unchanged in the third quarter from a year ago.


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.

Copyright © 2019 Reis, Inc.

 

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