E-Commerce And Manufacturing Lift Market For Industrial Space
Investor's Business Daily
Industrial property landlords in the U.S. enjoyed steady occupancy gains in 2012 amid expansions in the manufacturing and e-commerce industries.
Warehouse users, manufacturers and other industrial tenants soaked up roughly 50 million square feet in the second half of the year, lowering the average vacancy rate nationwide to 12.4%, a 110-basis-point improvement from a year earlier, according to New York-based commercial property watcher Reis.
On average, landlords asked for $5.37 a sq. ft. at the end of 2012, a 1% hike over the prior year.
"When you look at the head winds — the volatility of an election year, the European debt crisis and our own fiscal issues — 2012 was a pretty good year," said Edward Schreyer, president of agency brokerage and asset services for the Americas in the Dallas office of commercial real estate brokerage CBRE (CBG).
Whether industrial property fundamentals will keep improving is up for debate. Leasing activity slowed in the fourth quarter of 2012, largely due to the unresolved government fiscal crisis, Reis says.
Potential sequestration — mandatory cuts — could reduce government spending by $85 billion this year, about 3.2% of the budget. But it remains a threat to the industrial market, if not the overall economy, says Reis economist Ryan Severino.
"The economy is recovering but it's still on shaky ground," Severino said. "If Washington isn't careful about the money it pulls out of the system, it certainly could have an impact.
Drivers In Place Still, Severino and others maintain, industrial property fundamentals are otherwise situated to keep improving. Build-to-suit projects composed most of the 38.8 million sq. ft. completed in 2012, according to CBRE, so supply remains constrained.
Meanwhile, lending to small business is thawing and driving expansion, says Michael Frankel, a managing partner of Los Angeles-based Rexford Industrial. The firm, which owns some 7 million sq. ft. of industrial space primarily in Southern California, caters to small and midsize companies. To raise cash a couple of years ago, some small businesses sold their buildings to Rexford, which then leased them back to the companies.
"These companies had 25-year operating histories and orders in hand, but they couldn't get a credit line," Frankel said. "That's how dire it was.
What's more, suppliers continue to fill up space near automakers, particularly as they expand and retool plants. Detroit's average vacancy rate dropped to 11% in the fourth quarter from 14.4% a year earlier, according to CBRE. In December, Ford (F) said it would spend $733 million in six southeast Michigan plants in the coming months, part of a larger effort to invest $6.2 billion in its U.S. operations by 2015.
E-commerce has also emerged as a demand driver. The U.S. Census Bureau this month estimated that 5.4% of retail sales in the fourth quarter of 2012 took place online, a year-over-year increase of 15.8% and the highest percentage ever.
"E-commerce has magnified the impact on the distribution of goods," Frankel said. "It's driving new demand that wasn't here 10 years ago.
It's pushing changes in distribution operations and design, as well. Bulk goods may enter a warehouse off of an 18-wheeler, but instead of heading to a store in another big truck, they leave a few at a time in a FedEx (FDX) or UPS (UPS) van, Schreyer says. Online sellers are targeting large population centers near FedEx or UPS hubs that have an abundant seasonal workforce, such as college towns.
Accelerating Acquisitions Improving fundamentals, haste to beat potentially higher taxes and a flood of capital seeking commercial real estate propelled $13.5 billion in industrial property sales in the fourth quarter of 2012, according to New York-based Real Capital Analytics. That figure is the highest quarterly dollar volume since the third quarter of 2007, the company notes.
Among other buyers, Malvern, Pa.-based Liberty Property Trust (LRY) spent $207.4 million on 26 industrial properties during the year — 22 in the fourth quarter — while Denver-based DCT Industrial Trust (DCT) plunked down $338.4 million for 32 properties. It bought 21 of those locations in the fourth quarter.
The fourth-quarter binge turned around what otherwise would have been a ho-hum year — total sales of $39.6 billion in 2012 outpaced 2011 by only 4%. But real estate investment trusts and other funds are likely to maintain their newfound acquisition ambitions, especially in core markets like California's Inland Empire east of Los Angeles.
"There's an abundance of capital chasing too few deals," said Frankel, whose firm recently closed its fifth private equity fund with $127 million in commitments. "A widely marketed asset that's targeting institutional investors is going to attract 40 or 50 offers from around the world.
Indeed, the penchant for major markets over smaller ones has created a wide price discrepancy in capitalization rates. Cap rates measure a property's initial yield and fall as prices rise. In the Inland Empire last year they averaged 5.9%, for example, compared with 8.6% in Indianapolis, Real Capital says.
DCT Industrial CEO Philip Hawkins suggests that the price bifurcation between primary and secondary markets could soon narrow. Speaking to analysts this month, he suggested that investors were about to become more aggressive in a search for higher yields.
"I think that as more capital tries to buy more industrial and is frustrated by that attempt, the capital will continue to flow where it's not as prevalent today — into stabilized assets in secondary markets as well as taking on more risk," he said.
