Traditionally, imports have been the biggest driver of demand for the industrial sector, so anytime there is concern about a trade war, the sector needs to closely monitor the situation, says Sean Spellman, chief development officer for CA Ventures. "While it doesn't appear the trade war will escalate much further, if it did, the traditional 'path of goods' markets like Chicago, Dallas and Atlanta would certainly see weakness—at least until those issues are resolved," he says.

There are some remediating factors: for starters as Spellman notes, imports actually grew since recent trade disputes escalated last year. Also, e-commerce is just as strong a driver behind industrial activity as is trade.

The new supply too represents a double-sided sword for the sector. While it is answering demand, some of the product is not up to the satisfaction of buyers.

"It's tough to find good deals in a market that is saturated with average supply," says Jimmy Ullrich, a director at Stan Johnson Co., There are too many buyers chasing too few high-quality deals. And when a quality deal hits the market, savvy investors will snap it up immediately. Some deals are even trading off-market in today's environment."

He saw similar trends back in 2005, although leverage levels are lower today, but regarding price, he says there is downward pressure caused by the abundance of capital, and pricing can easily get distorted. "There remains a disconnect in buyer-seller expectation, and until that gap gets smaller, it's tough for a prudent investor to wade through these waters," Ullrich says. "If you dig deep into the inventory though, there are certainly great deals to be made."

A Positive Forecast

While fundamentals in the industrial asset class may be shifting in some respects, the sector's outlook remains bright.

In a recent 2019 outlook called Confidence in Uncertain Times, analyst firm BTIG asserted a positive outlook for the industrial REIT sector based on constructive supply and demand fundamentals and expected positive estimate revisions. Since then, industrial REITs have outperformed the overall REIT industry. In fact, BTIG expects industrial REITs to outperform through the balance of 2019 and into 2020 and in April, had even raised its price targets for buy-rated companies like Prologis, Duke Realty and Terreno Realty.

And even though fundamentals are starting to even out, demand still remains strong, Spellman says. Barring an economic downturn, he says, there is minimal risk of supply swamping demand and dramatically pushing up vacancy rates. "Altogether, we anticipate rents to continue to grow as demand outpaces supply into 2020."

That means, of course, the pool of buyers remains as deep and broad as ever.

Ullrich says that reconfiguration of retail's supply chain is driving demand for both warehouse and distribution space. Also, institutional capital has fallen in love with the asset class and are coming into the space in droves, driving down yields. "I never thought I'd hear 'Greenville-Spartanburg' as a buzzword on the streets of New York City, but quality product in markets of all sizes can be really attractive in today's market."

Also, he adds, there is a new demand driver that is coming from 1031 exchange buyers who have spent decades buying low cap rate retail properties and are now growing weary of negative headlines. "The doom and gloom—whether real or perceived—surrounding portions of the retail sector is causing some private buyers to migrate to industrial, which can offer better yields," he says.

Market By Market

Going beyond these top-level observations, there can be significant differences in demand and supply drivers on a market-by-market basis.

For example, Cushman & Wakefield's recently released New Jersey market report showed that existing class A industrial opportunities remain scarce, and many tenants are opting for new development. In the report, Jason Price, Cushman & Wakefield's Tri-State Suburbs research director said that proposed and under construction warehouse sites accounted for 43% of the first-quarter leasing total.

On the other side of the country, logistics users aren't just driving industrial construction in Phoenix, they are driving a niche industrial market. According to JLL research, mid-bay industrial product accounts for nearly half of the total construction pipeline in Phoenix. JLL noted that there are currently 23 mid-bay industrial facilities totaling 2.5 million square feet under construction in Phoenix. This is 42.1% of Phoenix's total construction pipeline.

This product type ranges in size from 50,000 to 200,000 square feet, JLL VP Kyle Westfall recently told sister publication, GlobeSt.com. "The product offers flexible space sizes, and with that, the product has great building functionality," he says. "The functionality, like quality clear heights, truck maneuverability, dock-high loading and high parking ratios, of industrial product is becoming more important to occupiers. That allows for a multitude of different kinds of users to occupy the space."

The Southeast, Stan Johnson's Ullrich says, is in favor right now due to high population growth, job growth, and manufacturer relocations. Markets like Charlotte, Raleigh-Durham, and the aforementioned Greenville-Spartanburg, he says, all continue to grow and attract both private and institutional capital.

Florida has also always been great because of its 0% personal income tax, he adds. "The Pacific Northwest is also very popular with investors, particularly Washington with no state income tax," he notes. "Yields here are very tight. And while the Midwest may not present the population growth story, this region can offer higher yields for investors too."

There are many examples of industrial redevelopment happening all over the country, but it is especially prevalent in Southern California, where ground-up development faces numerous obstacles including a scarcity of developable land, industrial areas being rezoned for multifamily in light of the housing crisis, and the high costs of construction labor, explains BLT Enterprises' Huberman. "SoCal also sees strong demand for creative office and industrial space due to the entrepreneurial nature of its business community."

In addition, Huberman says that Southern California's extremely low industrial vacancy rates coupled with high demand are driving up rental rates in even the most basic industrial properties, so users are enthusiastic about space that not only also offers them what they need to compete (high clear heights, ESFR sprinkler systems, amply-sized truck courts, etc.), but also looks great and functions better than basic space—all at an affordable price.

"This demand is exacerbated by the extremely tight vacancy and availability of industrial square footage—not just in San Diego but in all SoCal markets."

All of these trends are overlaid by one overarching factor: the dizzying growth of e-commerce and its influence on the industrial asset class.

For the industrial sector, the main markets have traditionally been "path of goods" markets, notes Spellman. "In recent years, the e-commerce revolution, which has given rise to same- or next-day shipping, has put a focus on being closer to end consumers."

Spellman explains that markets that were ignored 15 years ago are now on the radar. Boston, he says for example, historically was not a place where institutional investors wanted to deploy capital but is now a market that's seeing increased activity.

A Tenant-Focused Orientation

Without a doubt industrial remains a landlord's market, but that doesn't mean landlords are ignoring tenant tastes and demands. To the contrary—and especially now as supply is beginning to catch up—the industrial sector is more tenant-focused than ever before, Huberman says. "Users are seeking better-designed spaces that not only function more efficiently to accommodate increased technology and automation in industrial processes but are also eye-catching and offer updated features and services."

The "plain vanilla" buildings with stark interiors of past eras are rapidly being replaced with sleek, modern versions that offer striking design features and state-of-the-art amenities—much like today's creative-office space across the country, he continues. "In short, these are not your father's industrial buildings."

The building in Vista, CA, was no anomaly for BLT Enterprises. Huberman says his company's strategy to meet the demand has been to renovate older properties to provide the updated amenities users want, repurposing traditional warehouses into new and fresh uses, and constructing new facilities that incorporate current design elements.

As another example, his company is completing a series of renovations and upgrades of 5490 Darwin Ct., a 60,000-square-foot industrial building in the coastal North San Diego submarket of Carlsbad. The improvements include new roof and skylights, additional perimeter windows, a new glass balcony, and the removal and replacement of lobby stairs. The changes also extend to the property's esthetics: the landscaping has been upgraded with drought-tolerant plants that accentuate the outdoor employee patio and activity area.

"Being sensitive to users' needs and working with them as their needs shift helps us to retain tenants for the long term," he says. "Whether we satisfy those needs by renovating, negotiating a lease for them in a different property we own, or constructing brand-new ground-up space, paying attention to tenants and maintaining strong business relationships with them keeps us on top of current trends and allows us to respond to them quickly."