More Markets See Warehouse Caps Under 5%
As core investors widen their hunt for high-quality warehouses, industrial capitalization rates are plunging to new lows in markets around the country.
Capitalization rates in the range of 4-5%, previously achieved in the super-tight markets of Southern California and New Jersey, are increasingly showing up in other coastal cities, such as Miami and Seattle, and even some inland areas like Dallas/Fort Worth and Chicago. Spurred by low interest rates, record occupancy rates and forecasts of rising rents, buyers are bidding up prices on prime properties amid scarce supply.
"We are seeing record cap rates in major markets," said Josh McArtor, an executive vice president on CBRE's national industrial sales team. "I have never seen investors so bullish on the fundamentals."
Noting that initial annual yields below 5% "are not so rare anymore," one veteran industrial acquisitions pro said: "A lot of investors have core money, and when something falls into that bucket they are willing to pay up for those properties. Because there isn’t a lot available in Southern California or New Jersey, people are now saying, ‘We will look at Atlanta or Chicago or those other big markets.’ With 10-year Treasurys under 2%, people are going to say a four cap isn’t so bad.”
Prices are pushing beyond the previous market peak in 2007, as the industrial sector has become more attractive to institu- tional investors, in part because of the boom in e-commerce. Meanwhile, listings aren’t keeping up with demand.
“Most folks are hanging on to their best stuff,” said a Seattle broker. “So when the brand new, shiny core product becomes available, it is highly sought-after.”
In one current example, a J.P. Morgan partnership has a buyer under contract for two Dallas-area warehouses at about a 4.5% cap. The buzz is that the deal values the 603,000-square- foot Riverpoint Commerce Center, in Grand Prairie, Texas, at $78/sf, or $47 million. CBRE is the broker.
The property fits the profile sought by core investors: Large, high-quality buildings, completed just last year, with above- average ceiling heights of 30 or 32 feet and close to a major transportation hub — Dallas/Fort Worth International Air- port. They are fully leased, with contractual rent bumps and a weighted average remaining lease term of 7.6 years. That means little near-term potential to raise rents, making the low cap rate all the more impressive.
Dallas-area industrial cap rates were hovering right around 5% just a few months ago, according to a CBRE report in Febru- ary that said they were expected to remain flat. Other local pros shared that view.
“We thought we’d be flat because there wasn’t much more to compress,” said Jud Clements, a senior director and Dallas industrial broker at Cushman & Wakefield. But, he said, “it’s been a very active market, mainly from institutional capital — the type of investors that gravitate to the core product.”
The Seattle area is benefiting from tight supply in Southern California. Domestic and foreign investors have been migrat- ing up the coast in search of high-quality properties, creating bidding wars and pushing cap rates to new lows.
LaSalle Investment has a buyer locked in on a pair of warehouses in Sumner, Wash., at just under a 4.5% capitalization rate, according to market pros. The fully leased buildings, completed in 2014 with modern features, total 428,000 sf. The pricing is roughly $110/sf, or about $47 million. Colliers International is advising Chicago-based LaSalle.
Meanwhile, MetLife and Panattoni Development of Newport Beach, Calif., are marketing a suburban Seattle warehouse that’s expected to trade with an initial annual yield between 4% and 4.5%. The low end of that range would translate into a price of $25 million, or about $120/sf, for the 206,000-sf Steele Build- ing, also in Sumner. The property, designated LEED silver, is leased to two tenants through 2021. Although it was completed just last year, the rents are already below the fast-rising rates in the market — the kind of metric that’s making buyers very bullish.
A large listing in Miami has the potential to set a new bench- mark in that market. As previously reported, Flagler Develop- ment of Coral Gables, Fla., has tapped CBRE to market a new, fully leased industrial park adjacent to Miami International Airport. The 938,000-sf South Florida Logistics Center could fetch about $220 million, or $235/sf, for an initial annual yield of about 4%.
In the Atlanta area, a trade last month registered a 5.1% cap- italization rate, which local pros said marked a new low for that market. Clarion Partners of New York paid $40.8 million, or
$62/sf, for the 653,000-sf Riverside Business Center, in Lithia Springs, Ga. The fully leased property, built in 2013, has 36-foot ceilings and modern sprinklers. Colliers advised the seller, IDI Gazeley, a unit of Brookfield Property of New York.
Warehouse rents in the Atlanta market have increased for 10 straight quarters, finishing March 6.1% above the same point last year, according to Colliers. Even though construction has picked up, it isn’t keeping up with demand and rates are expected to rise further this year.
“Properties like this are hard to find. There aren’t many that check all of the boxes like this, and there is rent pressure to vali- date those low cap rates,” said Dennis Mitchell, a Colliers senior vice president who brokered the Riverside deal. He added that the cap-rate record “is not going to stand for long.”