Ten-X: Tech Shifts Spur Industrial Real Estate
The industrial sector continues to benefit from the same technology shifts challenging the retail and office sectors, reported Ten-X, Irvine, Calif.
Rising consumer dependence on e-commerce and mounting demand for data centers to support cloud computing is driving “robust” industrial real estate absorption, the Ten-X U.S. Industrial Market Outlook said.
“More than any other class of commercial real estate, the industrial sector has reaped the benefits of an economy and culture that is becoming more and more dependent on modern technology,” said Ten-X Chief Economist Peter Muoio.
Muoio said despite a prolonged slump in oil prices, these tech trends are boosting the segment. “While much of commercial real estate’s future appears murky, the outlook for industrial remains strong,” he said.
Nationally, industrial vacancies stand at 7.6 percent–their lowest level since 2000. With both supply and demand expected to soften through 2018 as the economic cycle matures, vacancies should bottom out in the mid-7 percent range, the report said.
Rent growth has held steady in the mid- to upper-2 percent range for several years, Ten-X said. Capacity utilization has trended upward throughout 2017 and industrial production has also spiked to its highest level since 2014.
The report also noted trade flows have steadily improved, in part due to increased shipping from Asia and recovering import demand in North America. “However, significant risks remain from protectionist policies, rising geopolitical tensions and a mounting toll from a series of natural disasters,” Ten-X said. “While the Trump administration remains unsettled on a concrete tax plan, its decision not to pursue and pass a border adjustment tax is an encouraging sign for future trade growth.”
National industrial deal volume rose to $15.8 billion during the second quarter, up 14.4 percent year-over-year. Pricing across the sector rose to a new record $80 per square foot. Ten-X forecast effective rent growth will exceed 3 percent through 2018–the first time it will have topped that figure during the current cycle. But absorption could turn negative in a cyclical downturn, which would push vacancies back into the mid-9 percent range by 2020.
“However, this vacancy level would be well below that of previous downturns,” the report said. “Rents are set to remain unchanged during a downturn.”
Ten-X said Los Angeles, Nashville, Tenn., San Diego, Portland, Ore. and Sacramento, Calif. are the top markets investors should look to for industrial assets. Notably, three of the top five “buy” markets are in California, which benefits from trade flows with China and trans-Pacific commerce.
The report highlighted Dallas, Baltimore, San Antonio, Texas, Washington, D.C.’s Maryland suburbs and Columbus, Ohio as five markets where investors should consider selling industrial properties. “While many of these markets boast solid economies and currently healthy industrial sectors, large supply pipelines and other factors leave them exceptionally vulnerable in the event of an economic downturn,” Ten-X said.
