What's Behind Q3's Industrial Investment Sales Slowdown

Investment sales volume declined in the white-hot industrial sector in Q3, following five quarters of robust growth, pointing to the “acute reality” of the current economic situation,  according to Avison Young’s Erik Foster.

“The recent rapid boost in interest rates is prompting many investors and lenders to pull back from commercial real estate and re-evaluate their market positioning, underwriting projections and tolerance for near-term risk,” Foster says. “While other market sectors have seen more significant sales declines, the industrial sector is now seeing its first recent sales decline, following five quarters of year-over-year increases ranging from 15% to 166%. In Q3 2022, industrial sales declined by 30.7%, a sign that investors are retrenching to re-examine their go-forward strategies amidst significant economic volatility.”

Meanwhile, however, leasing fundamentals remain strong, with vacancies hovering at historically low levels in many markets and rents continuing to push up. And while capital costs have increased, Foster says the slowdown in industrial sales should be brief.

“Positive industrial asset fundamentals continue to benefit owners, therefore, as lending liquidly becomes more prevalent in the coming months, we believe that investors (and sellers) will learn to comply with the new realities of the price of the debt as transaction volumes increase in the future,” he says.

Debt financing is showing signs of strains, as rapid rate increases by the Federal Reserve have prompted some large lenders to pull back on CRE lending. That in turn is pushing companies to seek alternative financing options like using fixed-rate debt or hedging variable debt, according to Avison Young.