WMRE: Investors Still Find Favor with the Industrial Sector
By Rob Sistek – Senior Managing Director, BKM Capital Partners
August 3, 2022 – THERE ISN’T A more appealing or attention-grabbing commercial real estate asset class today than the industrial sector. The property category has experienced record performance and returns over the past few years and that’s attracted an influx of capital from institutional players.
Capital markets are bullish on the industrial sector because there’s both strong secular demand for the asset type and a shortage of supply in some of the industrial sub-sectors. Investments in industrial real estate have largely outperformed other asset classes due to strong fundamentals, which have benefitted from e-commerce (particularly last-mile distribution), labor shortages, increased consumer expectations and, more recently, U.S. onshoring of manufacturing. In fact, manufacturing demand is expected to rise this year as more companies onshore their operations to avoid supply chain disruptions.
As we move through 2022, we should expect these fundamentals to continue to favor industrial. Rapid growth in urban logistics remains strong despite record inflationary pressure, which is primarily driven by energy, automobile and food sectors rather than merchandise or consumer products that require warehousing.
These factors spurring growth in the industrial sector are creating interesting shifts and pressures on inventory management. Global supply chain and logistics issues are resulting in an increase of inventory on-hand, or what is commonly referred to as a “safe reserve.” And, simultaneously, due not only to supply chain issues but to global economic events as well, retailers continue to have difficulties securing goods that are manufactured overseas.
A compelling case for industrial
Investors are expected to continue targeting real estate for attractive returns and stability relative to other asset classes, and increasingly, as an inflation hedge, which is expected to drive increased investment volumes in 2022. In the search for higher yields and strong cash on cash returns, institutional capital is being drawn to alternative investments like light industrial properties (predominantly in the U.S.), which is exhibiting extremely strong market fundamentals and rent growth.
Capital continues to look for market opportunities that are less efficient and where one can add value through repositioning, capital improvements and more sophisticated management. Many investors are still under-allocated to industrial and looking for a way to increase their allocation to ultimately achieve their risk and return targets.
Industrial real estate is proving to meet and exceed the return requirement investors seek, compared to other asset classes or investment options. Investors are paying close attention to rapidly rising rents and increasing NOI, which in turn boosts IRRs and equity multiples.
Another attribute that makes industrial real estate such an attractive option to investors is the resilience that this asset class has shown. Industrial assets performed well and maintained rent collections throughout the Great Financial Crisis, as well as the pandemic. Annual rent increases help protect investors from inflation and there continues to be strong secular demand for industrial space. The infill nature of light industrial, with strong land values and locations that are attractive for alternative uses, also helps create an element of downside protection for investors. When this is combined with the attractive return profile, light industrial creates a compelling risk-reward in today’s uncertain investment environment.
This piece is featured in WMRE 2022 Midyear Outlook. More articles can be found here.