Industrial Will Be Hot In 2018
There are ebullient investors in the industrial market. Here’s why.
The past 12 months have been phenomenal for industrial real estate investors and developers. The market is as tight as it has ever been, mostly due to the fact that over the past nine years very little development of warehouse space has occurred and there is a spike in demand. Only 1% of the total market was being replaced with new product every year – the result being that many of the buildings are at capacity and many of the buildings are not adequate for modern warehouse needs.
What is especially amazing, is that this is true in nearly every major market in the US and leasing demand does not show signs of slowing.
Last year, I partnered with the principals of Brennan Investment Group, LLC to acquire and develop industrial real estate. Being able to leverage the relationships and market knowledge that Cardinal Real Estate Partners has cultivated in one of the fastest growing regions in the U.S. means Brennan is poised to make substantial investment into development and acquisitions
Last week I was in Chicago for the Brennan year-end conference and listened as Mike Brennan talked about the “Rise and Fall of America” as it relates to industry. He pointed out how Europe’s economy typically follow America’s by three years and that Europe and the U.S. are synchronized and that global industrial development is strong. Former Fed Board of Governors Chair Janet Yellen recently commented that this is the best economy that America has ever seen (she said this as she was walking out the door – perhaps a bit self congratulatory, but it can be debated that it was true). As it relates to our home economy, the U.S. GDP is over 4% and, as it relates to industrial space, there is a strong correlation between GDP and the demand for industrial real estate.
History has shown the industrial real estate returns follow a positive correlation to a region’s GDP. The U.S. has had a fairly steady upward trend in GDP since 2008, with GDP predicted to reach close to $21.5 billion next year. European GDP, meanwhile, has been trending downward, a pattern that is predicted to continue. This decline, combined with the uncertainties surrounding Brexit (when the United Kingdom leaves the European Union in 2019), mean more investment will be moving to the U.S. in the future.
During the Brennan year-end meeting in Chicago, we also discussed where the continued demand will come from. The drivers are most likely to be coming from the following: Automation/Robotics; e-commerce; Automotive (in the Carolinas) and housing. It was interesting to note how both traditional industries (such has housing) and new industries (such as e-commerce and data centers) are both lit-up and are fighting for vacant space. As a result, the Brennan portfolio (+/-35MSF-#19 worldwide) is 94.5% leased.
In 2018, it is my belief that we are going to continue to see higher values for the traditional “B Grade” industrial properties that I love.
In industrial real estate circles there will be lots of talk of “Cap Rate Compression” (when the return that the investor expects is getting closer and closer to the cost of capital) and confidence will continue to build that industrial provides the lowest risk in the alternative real estate asset classes. As a result, there will be a lot of capital available for industrial deals, and deals once considered risky and speculative will be attractive to conservative investors.