What’s Next For Industrial’s Growth Story? Bidding Wars.
By year-end, the sector could notch $85 billion in sales.
Industrial has thrived since the pandemic began.
That strength is showing up in sales numbers.
Through the third quarter of 2020, industrial posted $55.4 billion in sales, according to JLL Research. That represents the second-highest tally for volume by sector through three quarters.
JLL expects industrial sales in the US to close out the year with between $75 and $85 billion in volume.
As industrial grows in popularity, values continue to rise. Industrial pricing is up 7.4 percent year-over-year and 1.9 percent from Q2 to Q3 2020, according to Real Capital Analytics.
Strong fundamentals are diving these valuations. In Q3, industrial rents reached a historic high of $6.32 average per square foot nationally, which is a more than a 36-percent increase over the previous cycle record set in 2007, according to JLL. Rent collections hit 99.4% in July.
With COVID delaying development pipelines by two or three months, new deliveries will be limited in the second half of 2021, according to JLL. That could lead to bidding wars for new properties, which would only increase values.
Much of the growth in industrial is being driven by online shopping. “E-commerce leasing is dominating the industrial market, with a total of 71.3 million square feet year to date,” Peter Kroner, Investor Research, Industrial at JLL, said in a statement. “COVID has completely catalyzed tenant expansion, specifically in the latter half of the second quarter, and throughout the third quarter as retailers scrambled to bridge direct-to-consumer gaps in their supply chain.”
The industrial sector still has the capacity to grow. Earlier this year, JLL predicted that demand for industrial real estate could reach an additional 1 billion square feet by 2025 as e-commerce sales continue to grab market share.
As of October 31, JLL Capital Markets has 103 sale transactions totaling nearly $3.98 billion either under contract or letter of intent as of October 31. JLL is also actively sourcing $2.9 billion worth of debt placement transactions for 85 industrial acquisitions and refinancings.
The 103 sales transactions JLL has under contract or letter of intent average a little more than 313,000 square feet and $41.5 million, resulting in an average of $132.53 per square foot.
While the trends look great for industrial, Jonathan Needell, president and chief investment officer of KIMC, told GlobeSt.com that the market is bifurcated. Buildings that can accommodate Amazon or FedEx will fetch low cap rates, but some assets won’t attract that tenant base.
“The reality is that not everybody can get a tenant like that, and not every property deserves a cap rate backed by those kinds of tenants [Amazon and FedEx],” Needell told GlobeSt.com.