Property Sales Plummet in First Half of Year

As with other commercial property types, industrial sales activity plummeted in the first half of 2009. The dearth of sales and price distortions caused by a growing inventory of distressed properties that sometimes sell for pennies on the dollar leave little grounding for establishing true value in the market. Reluctant to overpay, the majority of buyers are waiting on the sidelines, trying to figure out how to figure out which deals make sense.

According to Grubb & Ellis, a mere $2.2 billion of industrial properties valued at greater than $5 million sold in the first five months of the year. The figure was down 81% percent from the same period last year and substantially below the average for the three years before that. Moreover, according to Marcus & Millichap, in Q1 the inventory of distressed industrial properties increased more rapidly than the other primary commercial property segments.

As dramatic as the decline was, even more dramatic was the rise in cap rates. By Grubb’s calculation, the average cap rate for industrial deals was 8.1%, up from 7.4% in ’08 and 6.9% in ’07. Colliers pegs the cap rate significantly higher at 8.65%. But while cap rates are pushing higher, Marcus & Millichap says prices for industrial assets have declined only marginally. It attributes the relative stasis to the the fact that the majority of properties that sold had below-average vacancy levels but also had credit tenants in place. But an additional factor appears to be an already low average. Colliers pegs the average mmidyear sales price at $66.88 a square foot for completed product and $10.77 a square foot for land.

To a large extent, the low pricing reflects the impact of distressed property sales. While industrial properties make up only 2.5% of the total value of distressed US assets for the first half of the year, according to Real Capital Analytics, the figure is nonetheless up dramatically from a year ago, when it was under 1.5%. Hessam Nadji, managing director of research services for Marcus & Millichap, expects distress in the industrial sector to increase further in coming months as job losses and low demand for goods moving through warehouses and distribution centers reduce occupancy levels and lower rents.

RCA lists 199 US industrial properties valued at $1.7 billion as distressed as of June 30. About 120 of these have fallen into distress since the beginning of the year. Delta Associates finds the situation somewhat worse. Its statistics show close to $4 billion of distressed industrial properties at at the end of June, nearly double February’s level and triple the level of June ’07. According to RCA, warehouses and distribution centers account for not quite half the total, while flex properties account for about 40% and single-tenant buildings make up the rest.