Marcus & Millichap: Industrial Sector ‘Invigorated’

Several factors have “invigorated” the industrial sector’s outlook to a level not seen in years, said Marcus & Millichap, Calabasas, Calif.

“The prospects of accelerated economic growth and increased corporate investment under the new tax law will likely bolster demand, while the ongoing e-commerce-inspired structural shift benefiting the sector remains on course for expansion,” Marcus & Millichap Senior Vice President Alan Pontius said in an industrial sector report.

Pontius said these forces have pushed industrial asset vacancy rates to record-low levels despite rising construction in the sector. “The momentum can be felt in every aspect of the sector,” he said.

Debt availability for industrial properties is “elevated,” with a range of lenders catering to the sector, the report said. “National banks will continue to serve a significant portion of larger industrial deals while local and regional banks target smaller transactions in secondary and tertiary markets.” But underwriting standards remain sound principles, the report said.

Cap rates have dropped over the last three years to reach the low-7 percent range on average. “Many investors believe cap rates will rise in tandem with interest rates, but that has not been the case historically,” the report said. “The 10-year Treasury note yield neared 3 percent in February to mark the highest rate in years, pointing to strong economic data and diminished investor fears over the strength of the post-crisis recovery.”

The steady performance gains through this cycle have pushed industrial prices higher and higher, the report noted. As asset prices have increased, more investors are now pursuing yield by moving to secondary and tertiary markets, lifting velocity in smaller metros and boosting liquidity.

“As the pace of economic growth accelerates, it is likely it will be met with rising interest rates, which could modestly restrain investor activity,” Pontius said.

The report acknowledged some uncertainty among industrial sector investors surrounding the new tax law signed in December, but said that anxiety has started to abate. “Because key provisions such as the 1031 tax-deferred exchange, mortgage interest deductibility and real estate depreciation are changing little, investors will be well positioned to continue their strategies,” M&M said. “The conjunction of these positive forces could revitalize investor sentiment, strengthen decision making and increase market liquidity.”