Expert Says Strong Industrial Wave Nowhere Near Over

Industrial investors are wondering how long this asset class can sustain its top ranking.

Al Pontius, National Director, Office & Industrial Division, Marcus & Millichap, said during a company news video that interest rates have clearly caused some pullback in the marketplace.

But that may be short-lived. 

“We’re already seeing the gap in expectation between buyer and seller close. So given the popularity of industrial as an asset class, we’re going to see a continued escalation of transactions as more and more equity, earmarks, industrial for either portfolio balancing or simply to participate in the industry in the expectations going forward.”

Also, Pontius said although there is some oversupply right now, particularly in major markets in the short term, the anticipation is that the construction supply pipeline is going to slow.

In 2023, another 550 million square feet of industrial will be delivered, and that will outpace absorption for the year, raising vacancy rates modestly, according to Marcus & Millichap.

However, looking at 2024 and beyond – basically over the next five years – this will fall off to an average of 200 million feet per year.

No question, interest rates have had an impact, Pontius said.

“It’s very difficult to broad-brush the entire market because you have considerations such as sub-market, vintage, configuration, existing rents relative to market rents,” he said. “But the short story would be that cap rates have moved between 75 and 150 basis points on the averages.

“So, if average cap rates have moved 75 to 150 basis points, that would mean some deals are trading with negative leverage.”

Assets are trading with negative leverage today for several factors, he said, including where are the rents in that asset relative to the market and how fast can I get those rents to market.

Another consideration going to the other end of the spectrum is new property, he said.

“There’s a broadly held belief that construction costs will only continue to increase,” Pontius said. “So, if I buy a new asset today, I am automatically locking in a low basis relative to where newer properties will be years down the road.

“And correlated to that will be upward pressure on interest rates to come, one more time, especially in an environment where the supply spigot is going to turn off considerably.

“Again, that would be very contingent on location, configuration, and existing rents for starters.”

He said the reason industrial assets would trade with negative leverage is the anticipation of moving those rents in the relatively near term or going to the other end of the spectrum in a brand-new property.

“[Investors are] locking in a basis today that is already going to be lower than the basis will be in the future for new construction,” he said.

Newly constructed product is also a consideration. 

“There’s a broadly held belief that construction costs will only continue to increase,” he said. “So, if I buy a new asset today, I am automatically locking in a low basis relative to where newer properties will be years down the road.”

Correlated to that will be upward pressure on interest rates to come, one more time, “especially in an environment where the supply spigot is going to turn off considerably,” according to Pontius.