Gently shaken by improving fundamentals, the once-slumbering industrial sector has begun to stir. Investment activity and user sales increased approximately 35 percent and 50 percent respectively from 1Q09 to 1Q10, reports Cushman & Wakefield. Though the sector seems to have turned the corner, some markets are faring better than others. Thanks to goverment spending, growing export demand, and other factors, Baltimore, Chicago, and Phoenix all posted significant increases in industrial sales activity during the first quarter according to Cassidy Turley.
Lower asking prices have spurred on Buyers. Overall Investment sales volume dropped to more than $1.6 billion in the first quarter down from more than $2.5 billion in 4Q09, according to Real Capital Analytics. Capitalization Rates climbed from 8.8 percent to 8.9 percent but are expected to tighten as demand picks up.
Though institutional investors ramped up in the first quarter, private investors and regional owner-users, motivated by the narrowing bid/ask gap, still accounted for the majority of transactions. “Investor committee members don’t want to stick their necks out yet,” says Paul A. Waters, CCIM, CRE, SIOR, executive vice president of brokerage for NAI Global in New York. “The small private shops are more nimble, not having to rely on the Wall Street money that requires vast modeling and variable analysis to react.” As Industrial experts search for more signs of recovery, these nimble reactors will continue to create pockets of activity across the country.
Actors and Reactors
Today’s Industrial Sellers are those who have to sell, according to Tom Attivisimo, CCIM, senior director of Greiner-Maltz Co in Plainview, NY. “They bought at the height of the market and lost tenants or never got a tenant that would pay a high enough rent to cover debt services,” he explains.
In smaller markets, owner-users are bouncing on these vacant 25,000-to 300,000- square-foot industrial properties to accommodate the 45,000 manufacturing positions that employers added in the first quarter . “Users are buying vacant buildings at great prices since most real estate investment trusts and institutional investors don’t want the lease-up risk,” notes Tim DeGoosh, CCIM, CPM, vice president of Sares Regis Group of Northern California in San Mateo. In the Southwest, for example, high end manufacturing buildings, basic warehouse facilities, and other industrial product are available at prices that are 20 percent (or more ) below 2008 levels, according to Robert Glaser, CCIM, SIOR, Principal with PICOR Commercial Real Estate Services in Tucson, Ariz.
Research and development and flex properties, which are more closely tied to job growth, are seeing less action. “We have not seen many smaller flex users looking in the market, and the few that have toured are trying to renegotiate a better deal in their existing locations,” says Brian J. Young, CCIM, associate with CB Richard Ellis/The Furman Co in Greenville, S.C. As the economy continues to improve, however, these sectors should follow suit. In Tucson, for example, R&D -using industries like, solar, optics, aerospace/defense, and bio science lead the the prospects for industrial sector growth, Glaser says.
In markets where institutional investors are active, there’s a flight to quality. “Institutional capital is chasing any class A product that comes to market and seeking out off-market acquisitions as well,” says Steven J. Medwin, CCIM, SIOR, executive vice president of Jones Lang La Salle in MIami. Thanks to the fierce competition, “Pricing in some cases are almost back to 2007 levels with cap rates in the 7 percent range” Viktoria Telek, CCIM, associate with ComReal in Weston Fla, notes that ProLogis and Industrial Development International both recently put portfolios on the market. IDI’s asset, which includes four buildings totaling 679,000 sf in the Weston Business Center in Weston, received approximately 25 offers from various REITs, institutional investors, and private buyers, according to Daily Business Review.com. RREEF purchased the portfolio in April for 65 million, or about $96 per sf on behalf of a German fund.
In southern Florida and elsewhere, there’s still a lot of money on the sidelines searching for quality properties with stable occupancy. Competition among institutional investors is expected to remain stiff throughout 2010.
As a result of increased demand for warehouse and manufacturing product, many markets are poised for solid activity. The problem is that lenders have swallowed the key to many of these transactions. “Vulture Funds, and are doing the buying typically because the resources are private”-Cash, partner groups, and alternative sources of financing, Walters explains. If you don’t have the cash and can’t get creative, you’re out of luck.
Though prices have dropped and cap rates have spiked, distressed Industrial Properties remain rare due to the unique nature of the asset. “You can lease them for low numbers to cover debt service and expenses,” Waters explains. Plus, he adds in terms of repositioning and related metrics, these inherently boxy properties “can turn on a dime” As of 4Q09, industrial properties represented only 3 percent of the $172 billion in total troubled assets, according to Real Capital Analytics. In markets where distressed properties are available, “the Banks are not interested in a fire sale,” says Scott k. Perkins, director of Corporate Services at NAI.
Though more distressed product eventually will make its way into the market, Industrial Investment sales are not expected to make a major comeback this year. However, as the economy grows, this sector could be the first to emerge and soar. Until then, “The bread-and butter B-level infill product will continue to trade,” Waters says, ” But caution will be the overriding trend” (credit rich rosfelder ciremag)