2024 Industrial Outlook

With 2023 coming to an end, we took the time to ask our CRE professionals their thoughts on the upcoming year in addition to their reflections from 2023.

Reflect back on 2023. What were some highs and lows from this year? What is the biggest opportunity you see ahead in the coming year and how will you capture it?

"The 2023 rise in interest rates have created a displacement in capital markets. Transaction volume fell by 70% in that period as the rapid increase in cap rates put discretionary sellers on the sidelines. Interestingly, tenant fundamentals increased over the same period creating virtually no property distress in the industrial space, creating a lack of distressed sales. The sellers who were forced to transact did so for reasons unrelated to the asset which created an opportunity unique to this moment in time.

Low pricing with high quality tenants in a top notch asset is rare but available if you have the sourcing capability that BKM does. While the market suffered the lowest transaction volume in recent history, BKM executed more trades than it ever had, placing almost $300 million in equity."

-Brett Turner, Senior Managing Director, Acquisitions and Dispositions

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“2023 provided consistent fundamentals for BKM with strong rent growth, steady collections, and good property level NOI growth. We are excited for the opportunity ahead of us in 2024 because we think our tenants are ready to resume the growth plans they might have previously put on hold out of fears of a recession, or concerns about their customers’ end demand. 2024 feels like the year we collectively realize things aren’t so bad. In fact, they might even be, dare we say it … good.

We’re well positioned going into 2024 with excellent product and a strong operating team who is ready to execute our value-add strategy. We’re hitting our stride as a company and it’s exciting to see our personnel lean into the market opportunity we’re seeing. We made some acquisitions in 2023 that we’re very excited about, and looking forward to continuing to grow the BKM portfolio and brand in 2024.”

-Mason Waite, Managing Director, Asset Management

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"Despite the challenging debt capital markets in 2023, BKM executed over $300M in new financing, as well as numerous successful refinancing and loan modifications, resulting in one of BKM’s most successful growth years. This achievement is a testament to BKM’s reputation in the market, its bench of seasoned experts, and compelling investment thesis.

With continued growth projected in 2024, our finance team’s focus will be on scalability. For example, we have invested in a new treasury management system technology which will significantly automate cash forecasting, liquidity management and the recognition of receipts (e.g., tenant rent) using sophisticated AI technology, and integration with our ERP system."

-Mike Valdes, Director, Accounting and Financial Reporting

What concerns do you see over the horizon due to factors such as the economy, interest rates, inflation, a recession, supply chain issues, lingering pandemic impacts, securing financing?  

"Interest rates and the Fed’s monitoring of inflation will factor into a variety of variables.  Rate reductions should provide additional opportunities from a debt perspective and stimulate investors sitting on the sidelines with uninvested capital, which will have a direct impact for BKM who has already proven to be active in the market during a time when many others are not."

-Susan Rounds, Managing Director, Operations

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"I see a soft landing with continued growth in the industrial tenant base caused by geopolitical issues abroad and a new found focus on domestic logistics. Cap rates will pull back in as rates come down but not as fast as sellers would like causing a continuation of lower transaction volumes. Election rhetoric in the back half of 2024 will create some opportunities specifically in the private capital space (transactions below $25 million). Lenders will continue to take a risk-off approach as new CRE credit is plagued by loan maturity extensions."

-Brett Turner, Senior Managing Director, Acquisitions and Dispositions

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"2024 will be an interesting year for real estate. Over the past couple of quarters we have experienced challenging capital markets and large spreads in valuations. The hope for 2024 is to have greater stability and an increase in transaction activity. In regards to the real estate sector, I believe there will be specific asset classes that will outperform while others will continue to struggle."

-Nikki Chavez, Associate Director, Investor Relations

What strategy do you think will best navigate through 2024 and what adjustments need to be made to do so? What will BKM’s approach likely be (i.e. buy/sell/hold, develop, expand/contract, refinance, recapitalize, etc.)?

"To best navigate through 2024, I believe BKM should concentrate on raising the necessary capital to fully round out Fund III. Our adept handling of complex deals in a challenging debt market has proven the robustness of our investment approach. With a more favorable debt market and strong liquidity, we're set to continue our track record of exceptional execution. Moreover, the potential for declining interest rates, combined with the growing eagerness of investors to deploy capital, puts us in an advantageous position to exit Fund II at a value significantly higher than what was anticipated in 2023."

-C.E. Kaiser, Director, Construction Management and Business Process

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"Financing will continue to play a key role in strategy going into 2024. Reflecting on the banking crisis back in March, we experienced the collapse of banks, which occurred at lightning pace. What followed were national banks pulling back on lending and increased questioning into our banking system.

Working through transaction closings, we were thrilled to see several regional banks stepping in to provide financing. Insurance companies and debt funds have also played a key role in the bridging the gap and proving access to debt. While we won’t experience another low rate environment anytime soon, there’s an understanding of this new rate environment that both managers and investors are coming to terms with."

-Nikki Chavez, Associate Director, Investor Relations

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"Large transactions are proving challenging in today’s capital market environment so I think a tempered approach to asset sales makes sense. Certain assets will achieve attractive returns due to the strong property-level performance we have achieved, however deals over a certain size may prove difficult to complete until the second half of the year."

-Chris Evans, Director, Portfolio Management

What real estate property types did well in 2023 and which are expected to shine in 2024? Why? What are the merits (or demerits) of each asset class?

"I believe industrial and multi-family residential continue to be strong bets in 2024. While there may be greater caution around the outlook next year, particularly regarding slower rent growth in industrial, and recent condo/rental project delays in multi-family, both segments continue to have solid fundamentals that can produce strong cash-on-cash, relative to other segments of the market."

-Mike Valdes, Director, Accounting and Financial Reporting

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"In 2023, the industrial real estate sector, especially small bay industrial properties, clearly outperformed other property types. This was in stark contrast to sectors like office real estate, which struggled due to the shift towards working from home, leading to reduced occupancy and, in a tougher debt market, some defaults. However, industrial properties consistently showed strong performance.

As we move into 2024, I expect the trend favoring industrial real estate, and in particular small bay industrial, to continue. The high replacement costs for these properties act as a deterrent for new developments, which helps preserve the value of existing assets. Additionally, the diminishing prevalence of remote work is likely to have a positive impact. The expanded tenant base in the industrial sector is expected to sustain high rental rates and occupancy levels, contributing to the ongoing robust performance of this asset class."

-C.E. Kaiser, Director, Construction Management and Business Process

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"The Industrial sector has clearly been the winner in the post-pandemic environment. While all sectors were impacted by rising interest rates, industrial's strong fundamentals have kept the sector at the top.

Office product may have bottomed last year and could see a modest rebound in 2024, while multifamily may get hung up with very aggressive underwriting occurring the past few years, causing rents to plateau and even fall in certain markets."

-Chris Evans, Director, Portfolio Management

What markets are expected to be in growth mode and which ones are likely to be less appealing for investors? Which types are more appealing to investors and why, i.e. major markets, gateway cities, urban cores, suburban, others?

“BKM is strategically located in growth markets with strong demographics. We see these markets’ trend lines continuing up and to the right in 2024 as the recent fiscal stimulus provided via the CHIPS Act and Infrastructure Investment and Jobs Act continue to work through the system. Also, with the recent slowdown in the industrial development pipeline, we think our infill product will become even more valuable to businesses focused on serving their customers from a location and facility that is cost effective and convenient.”

-Mason Waite, Managing Director, Asset Management

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"Depending on the path of interest rates in 2024, multifamily and neighborhood retail should continue to remain strong.  Multi-tenant, light industrial will continue to remain strong with a positive outlook as re-shoring and nearshoring efforts continue to boost the sector.  BKM’s consistently high occupancy and leasing rates continue to prove the resilience of the light industrial segment."

-Susan Rounds, Managing Director, Operations

What are your goals for BKM in 2024? What would you like to see accomplished? 

"For BKM in 2024, my primary goal is the successful sale of Fund II. This fund encompasses assets that were acquired at an excellent value, each with significant upside potential. The standout performance of our construction team in repositioning these assets has transformed them into some of the most attractive properties in the market. Furthermore, our leasing team has excelled, maintaining high occupancy rates and securing rents at the top end of the market. Equally impressive is the work of our property management team, who have not only kept the properties in top condition but have also ensured tenant satisfaction. This comprehensive approach positions us well for a successful sale, fulfilling our strategic objectives for the year."

-C.E. Kaiser, Director, Construction Management and Business Process

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"BKM’s acquisition activities will continue to increase throughout 2024 as opportunities to acquire labor intensive, value-add, multi-tenant industrial continue to fill our pipeline.  To support this additional AUM, a focus on training and mentoring team members will continue, as well as hiring quality talent.  AI will have a positive impact on BKM’s technology stack by streamlining processes and providing efficiencies in areas that were once time intensive."

-Susan Rounds, Managing Director, Operations