Post-Pandemic Cap Rate Compression in Industrial Real EstateBy Salomon Noble | Tue, 06/28/2022 - 15:00
These days, we often hear that cap rates are compressing in the industrial and logistics real estate asset class. This trend is likely to continue even if interest rates increase as the Fed works to contain higher inflation, largely driven by post pandemic pent-up consumer demand, global geopolitical challenges (Ukraine/Russia), e-commerce and the generalized scarcity in all supply chain tiers.
Manufacturing and logistics companies, users of industrial space, are trying to keep up with increasing demand by expanding their footprints and redesigning their strategic sourcing, from single to dual/multiple sources, nearshoring and supplementing their domestic inventory policies from just-in-time to just-in-case. All this is resulting in record-high absorptions and almost zero vacancies across most metro industrial markets in the US and Mexico.
Industrial developers are working to supply the incremental demand for space with “spec-to-suit” projects. These are typically pre-leased well before completion and face a myriad of challenges that range from the scarcity of equipment (HVAC, electrical transformers, FPS) and construction materials to the overall cost increases and scarcity of land for development that is well-located and priced and urbanized with adequate infrastructure.
With almost no available inventory space, rents are increasing by double-digits in the most dynamic markets and secondary markets are getting the spillover from unsatisfied space demand in their neighboring metro markets.
Regarding alternative investments, the appetite for the industrial and logistics asset type continues to see capital at five-year highs and growing.
The question is, for how long? The countercyclical, record performance of the industrial and logistics sector, fueled by strong fundamentals, will eventually have to wind down as consumer demand weakens, the Fed launches more restrictive monetary policies, and the geopolitical environment continues to unsettle. However, structural “megatrend” changes in the strategic supply chain sourcing, such as e-commerce, nearshoring and “just-in-case” inventory management, will prevail and continue to reconfigure the industrial and logistics sector for years to come.
Going forward, the best the key players in the industrial and logistics sector can do is to expect an eventual slowdown, consolidation and a “flight to quality” into those portfolios COMPRISED of well-located class-A flexible facilities that are defensive in any economic cycle.
We all have our crystal ball to try and anticipate what the future will bring and surely, we will disagree on many projections, but one I am sure we all agree is that a quality industrial and logistics portfolio will perform well, as it has already done during the most turbulent times of this century.