Investor spending on U.S. industrial properties rose more than 50 percent since mid-year 2012, with buying competition so frenzied many of the new purchases this year have been in secondary markets.
National industrial sales volume increased to $23.2 billion by July 2014, according to New York City-based research firm Real Capital Analytics, a 55 percent increase from the $15 billion at mid-year 2012 and a 27 percent increase from $18.3 billion at mid-year 2013.
Erik Foster, national practice leader with the industrial capital markets team at real estate services firm Avison & Young, says there’s a lot of equity chasing the industrial sector, where vacancies are hitting pre-recession levels. “There are newer groups forming all the time to place that equity, because industrial space is hot and fundamentals are improving,” he says. “That means the competition is stronger and the pricing is getting way more aggressive.”
The lack of supply is also causing froth, Foster says, as there’s less than half the normal level of construction underway. Pre-recession, there was 250 million sq. ft. of industrial space rising in the national markets, and today it’s about half that, he notes.
“Speculative and build-to-suit activity is not getting ahead of itself,” he says. “One of the main reasons for the restraint is the lending community, they are aggressively pricing debt, and it still takes a large equity contribution to a do a transaction these days. The days of 5 percent to 10 percent have not yet returned.”
West Coast still beckons
Because the major markets have been picked over at this point, this year investors’ attention has been increasingly focused on secondary markets, though the West Coast is still the preferred region, according to RCA data. San Diego, for example, has seen a more than 250 percent increase in property sales, followed by Orlando, Fla. at 200 percent. Sales in both Minneapolis and Indianapolis increased by about 150 percent. Charlotte, N.C., Memphis, Tenn. and the Denver and Atlanta markets all have seen about a 100 percent increase in sales volume this year. Conversely, Los Angeles and Miami are seeing large drops in volume.
Investors haven’t shied away from trying to find good deals, however. Early this week, Chicago-based Brennan Investment Group announced a joint venture with clients of Greenwich, Conn.-based Arch Street Capital Advisers to purchase up to $300 million in industrial properties throughout the United States. The venture has already closed one deal, for a three-building, 174,170-sq.-ft. complex in Hamilton, Ohio leased to Matandy Steel and Metal Products. Michael Brennan, chairman and managing principal of the firm (and former CEO of First Industrial Realty Trust) says the industrial market is exhibiting considerable strength. “We see opportunities to invest in mission critical facilities throughout the country,” he said in a statement.
Other recent deals include USAA Real Estate Co. buying 1.5 million sq. ft. in two deals, the 744,000-sq.-ft. I-85 Distribution Center in Union City, Ga., near Atlnata, and the 758,922-sq.-ft. Dalport Trade Center warehouse in Wilmer, Texas. Monmouth Real Estate Investment Corp. recently purchased a 327,822-sq.ft. industrial building in Indianapolis net-leased for 10 years to FedEx Smart Post Inc. for $23.5 million. Boston-based STAG Industrial Inc. bought a 244,050-sq.-ft. warehouse in the Minneapolis market for $10 million.
Foster says the result of the competition boom in the sector will be strong rent increases over the next year, and continued improvement in secondary market sales.
“I don’t think the class-B attraction has peaked,” he says. “I think you’ll see more of the same in 2015, as well as good absorption and a steadily increasing construction pipeline.”
