Industrial real estate market is at top of its game, says JLL

By Jeff Berman, Group News Editor · December 8, 2016

A wave of tremendous momentum in the industrial real estate market is showing no signs of crashing anytime in the neat future, according to analysis recently issued by JLL.

The industrial real estate firm pointed to myriad factors for better than good market conditions in 2016, which it said are likely to continue in 2017, including: low interest rates, strong consumer spending, and e-commerce activity continuing to heat up. And on top of that JLL cited how potential future infrastructure investment, coupled with continued company expansion, could serve as demand drivers for future warehouse and distribution center development, too.

“Things continue to be on a nice roll seem to be on a pretty good path relative to continued stability in the market, said Craig Meyer, President of JLL’s Industrial group. “Demand seems to be continuing at a strong pace and is up annually in 2016 as we are looking at nearly 250 million square feet of absorption, which is ahead of last year’s 230 million square feet. We also have a continuing decline of vacancy rates in just about every market, and we are seeing increasing lease rates and rising rents, which is what happens when there is a declining vacancy rate, which is at 5 percent and could go lower than that at some point.

While there is nothing as a huge threat, Meyer said there are some things requiring a watchful eye in the market.

One is a new Presidential Administration, which, he said, appears to have a more pro-business environment that should continue to provide growth, especially with the proposed infrastructure spending, which could provide a good economic stimulus, especially in markets up and down the Mississippi River, an area he said is trade and transportation-heavy.

Something that needs to be monitored, though, looking ahead, he noted, is the relationship between the 10-year treasury rate and average cap rates, for industrial and commercial real estate sales, which is how industrial real estate firms value buildings and is something that potentially could have an impact on the market.

“People talk about cap rate compression and talk about the spread between the risk free rate and the cap rate, so wherever that spread is that distance,” he said. “Cap rate compression with a 0 percent interest rate is pressing down towards that. With rising interest rates, there could be an increase in the 10 year treasury bill rate, which means cap rates could rise in certain instances and values could decrease a bit, but even were that to occur, the rise in industrial lease rates could offset some of that, which so that is a continuing positive of market fundamentals.”

Meyer said the overall outlook for 2017 is positive in terms of leasing, and even though construction is up, nearly 50 percent of all construction is committed or leased, adding that the increase in speculative development is not significant from 2016 to 2017, with most market fundamentals being in balance.

In its analysis, JLL pointed to five primary factors that it said will impact the industrial real estate sector in 2017:

• the infrastructure revival, noting that the urbanization of U.S. cities cannot continue with functionally obsolete roads, bridges, and other infrastructure, as upgrades are planned, raw materials will be needed and warehouses to store them;

• e-commerce and urban logistics continue rapid revolution, with online shopping and consumer demand for rapid delivery changing what, where, and how many distribution centers are needed to feed the consumer e- commerce appetite;

• ports benefitting from both infrastructure updates and e-commerce, with the revival of America’s ports system driven by the consumer economy and the need for surrounding warehouse and mixed use infrastructure;

• institutional investor interest is higher than ever, as institutional capital still views industrial real estate as a lucrative investment opportunity, with year-end industrial investment sale volumes potentially reaching upward of $45 billion, the second highest tally since 2008; and

• the rise of creative real estate development, as demand for industrial real estate continues, companies employ new and creative real estate strategies. JLL cited how unprecedented industrial real estate demand and the push to improve last-mile delivery services may influence development throughout the country and lead some companies to look for space in secondary markets like Charlotte, Tampa Bay, and Kansas City, and smaller urban core warehouses and fulfilment centers and reconverted assets and multi-story warehouses could become last-mile offerings in 2017