Outlook For Industrial Investment Remains Strong
Greater liquidity, pent-up demand, and stronger fundamentals than previous downturns should continue to buoy the sector.
The outlook for industrial investment returns remains positive despite a shifting capital markets landscape, according to a recent survey of industry insiders.
ULI and PwC’s Emerging Trends survey echo this sentiment show respondents placing industrial/ distribution at the top of the list for investment prospects for four of the last five years — and experts at the firms say a slowdown in development could buoy rents at current historically-high levels for even longer, as structural demand remains solid.
In addition, a survey of industrial managers by MSCI Real Assets showed that in-place rents were 22 percent below spot market rents, and “this spread offers embedded net operating income growth for the foreseeable future,” analysts from ULI and PwC say.
The transaction volume for industrial warehouses increased by 11% year over year in the second quarter, according to MSCI data, in what experts from PwC and ULI call a “marked deceleration” from last year’s growth. And price discovery is also happening across markets with some sellers agreeing to come to the bargaining table and reprice due to rising interest rates.
But while “cap rates could rise, but there is now more liquidity, pent-up demand, and stronger fundamentals compared with prior cycles, which should help shield against severe correction,” the ULI and PwC report notes.
That aligns largely with a recent analysis from Avison Young’s Erik Foster, who said that Q3′s industrial sales decline of almost 31% is “a sign that investors are retrenching to re-examine their go-forward strategies amidst significant economic volatility.” But while capital costs have increased, Foster says the slowdown in industrial sales should be short-lived.
“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.