Port Cities Command Most Aggressive Industrial Cap Rates

Port cities are commanding the more aggressive overall capitalization rates for Class A properties although Midwest markets are not far behind, according to Cushman & Wakefield’s Industrial Investor Survey and Outlook for spring 2024.

Most investors in the survey do not anticipate further increases in overall interest rates, as their current yield rates have been considered or priced in any potential near-term rate hikes.

Activity in the 10-year US Treasury has resulted in higher yield rates and overall capitalization rates, as well as a higher cost of capital.

This led the average capitalization rates for Class A assets higher by 58 bps compared to the spring 2023 survey. Likewise, Class B assets rose by 45 bps and Class C assets were up by 52 bps.

The survey indicates a 79-basis point differential between Class A and B industrial product, and a 200-bp difference between Class A and C industrial facilities. Overall rates for Class C properties are 121 bps higher than Class B industrial product, according to the report.

Class A assets with long-term credit tenants at market rent levels (with escalations) or short-term tenants with below-market leases in place in Southern California, northern New Jersey, Dallas, southern Florida (Miami), and Chicago have the lower end of the cap rate range.

Additional markets noting high demand and growth include Atlanta, Charleston, Phoenix, Houston, Salt Lake City, and Seattle, albeit to a lesser extent.

Investors are also targeting Class B, and in some cases, Class C product, seeking higher rent growth and greater yield/return expectations—especially from assets with below-market leases in place that are near populated urban areas with access to a readily available workforce.

Assets near urban areas continue to be in demand due to reduced shipping and delivery times.

Logistics, food and beverage, cold storage, biotech/pharmaceutical, and data center assets are the preferred asset classes, according to Cushman & Wakefield.

That’s because e-commerce is clearly driving the demand, as online shopping continues to accelerate, especially with AI driving supply chain efficiencies.

“With a strong infrastructure in place in most markets, vacancy rates below long-term averages, and the continued push for onshoring and the availability of natural resources, the long-term investment outlook for the national industrial market is positive,” according to the report, with seaport cities and major logistics hubs are expected to remain the strongest performers.

The investor survey and overall capitalization rates results were provided by representatives of some of the largest institutional/pension fund buyers and sellers of industrial assets, nationally.