Even Industrial Assets Can Expect to Net Lower Profits in a Refinance
Demand is expected to cool but rents remain a bright spot for the category.
The one component of commercial real estate that appears to be on solid footing and expanding is the industrial sector. Average rents have increased while vacancy rates remain low, according to CommercialEdge.
However not even industrial can escape the current volatility in the capital markets and the effects it is having on valuations.
“Given the rise in mortgage rates and the tightening of underwriting standards enacted by banks in recent quarters, many properties refinanced today could net 20% to 30% lower profits than they did at origination,” the report cautioned. On the other hand, it notes that “many industrial loans coming up for refinance will have the benefit of increased revenue during loan seasoning.”
CommercialEdge as well as other analysts largely expect demand for space to cool to more moderate levels as large users reconfigure distribution chains to contain rising costs.
It points to Amazon as an example of companies reducing space estimates and cutting back on new projects. “ Some retailers are also using store space as a way of reducing demand for new logistics facilities.”
And like all of the other CRE asset classes, industrial sales slowed considerably in the first quarter to a total of $7.7 billion, well below the $20.5 billion sold in the same period last year and the lowest first-quarter volume since 2016.
One bright spot is the sector’s rents, which have increased every month over the past year through March to an all-time high of $7.15 per square foot, up 7.1% from the prior year while the average rate of new leases signed in the past year rose to $9.24 per square foot, gaining 15 cents month-over-month.
Rent grew most in large coastal markets like California’s Inland Empire, Los Angeles, Boston, Orange County, New Jersey, and Bridgeport. St. Louis was the only metro to post negative growth, falling 2% year-over-year.
Meanwhile the national industrial vacancy rate held steady at 3.9%. The lowest rates were mainly in the West and Midwest, as well as Northeastern consumer hubs like New Jersey and Bridgeport, which all had vacancy between 1.2% and 2.6%.