Clint Miller, Avison Young principal and global director of affinity groups
CHICAGO—Real estate developers and investors at a recent two-day industrial real estate summit staged by commercial brokerage firm Avison Young concluded that the market's continued decade long-run of strong growth will continue with lower vacancy and higher rental rates in top markets despite some economic headwinds.
"The industrial sector has experienced significant growth over the past 10 years as ecommerce and supply chain realignment have reshaped the way businesses utilize industrial space and deliver goods to businesses and consumers," said Clint Miller, Avison Young Principal and the firm's global director of affinity groups. "While there is concern regarding the long-term impact of tariffs and the potential for an economic downturn, we expect the industrial sector to weather any storm and maintain positive momentum."
The top markets are land-constrained and port-centric. Avison Young notes that the top industrial markets expected to continue to perform well into 2020 will be: California's Inland Empire, Dallas, New Jersey/New York City, Seattle, Chicago, and Miami, among others.
"Industrial remains one of the top investment classes, buoyed by corporate supply chain expansion and the ability to generate stable returns without the volatility seen in other market sectors," said Erik Foster, Avison Young principal and leader of the firm's U.S. industrial capital markets group. "As we head toward 2020, we're seeing investors focus on reducing risk and returning to core investments that can provide steady income growth."
In addition to economic instability and tariffs on Chinese imports as potential headwinds that could limit investment growth, summit participants say other negative influences could be overbuilding and rental rate stagnation in some markets.
Jim Clewlow, chief investment officer of Chicago-based CenterPoint Properties, pointed to Seattle, Los Angeles, Miami, Oakland and New Jersey as markets that have seen record growth and markets that will offer long-term stability even if an economic downturn takes place.
"We are looking for rental growth that doesn't have a lot of volatility," said Clewlow. "Markets with low vacancy rates, strong rental rates and proximity to ports should continue to fare well into 2020."
Most U.S. industrial markets tracked by Avison Young are reporting single digit vacancy rates, despite the influx of new product. The strong demand and tight supply are also putting upward pressure on rents in many markets.
Rent growth is a key indicator driving investment decisions, said Jojo Yap, chief investment officer and co-founder of First Industrial Realty Trust of Chicago, which has 63 million square feet of industrial assets in its portfolio and another 5 million square feet under development.
"A driving force for making profitable investments and avoiding capital and value destruction is increasing net operating income," Yap said. "We are very focused on investing in submarkets where we can achieve above average rent growth. Last quarter we boasted the highest rent growth of all national industrial REITs at 13.4% cash on cash on new and renewal leasing. That was the highest in our 25-year history."
The firm has shifted its portfolio in recent years to increase its holdings in coastal markets, given the potential for higher rental rates. "Twenty percent of our portfolio income is in Southern California—and growing—and overall the coastal, high barrier markets now represent more than 40% of our portfolio income," Yap noted.
"Rental rates are increasing at higher rates in coastal markets. We have seen increases of 40% or more on some rollovers in the South Bay area of Los Angeles and north of 25% in Miami," he added.
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John Jordan
John Jordan is a veteran journalist with 36 years of print and digital media experience.
