Katie Parsons of JLL on Today’s Industrial Sector
Katie Parsons is Managing Director and Head of the Industrial Sector for JLL Valuation Advisory, which conducts assignments throughout the United States across property types including warehouse/distribution centers, manufacturing, cold storage, food/beverage processing facilities, truck terminals, R&D facilities, industrial yards, business parks and airport-related facilities. Prior to joining JLL, she spent 14 years with Cushman & Wakefield, where she served as Executive Director and Co-Lead of the Industrial Practice Group for their valuation and advisory group.
MBA NEWSLINK: What is the overall sentiment in the industrial market and where are values today compared to six to nine months ago?
KATIE PARSONS, JLL: We’ve moved from a period of “irrational exuberance” to more realistic values as of today in the industrial markets. The days of throwing out a number to win a deal and penciling it out afterwards ended in first-quarter 2022. Current values still indicate that industrial is outperforming many other sectors, bolstered by incredibly low vacancy in the sector, which allows for significant rent growth to still occur and at least partially offset capitalization rate expansion.
NEWSLINK: Which markets are performing best?
PARSONS: Like other periods of uncertainty, investors are flocking back to core markets and best-of-best assets in supply-constrained markets. Supply constraints are partially due to a pull-back by developers due to future uncertainty, but also impacted in many cases by public pushback to more warehouses. Port access is more important as the supply chain begins to right-size. Proximity to growing population centers paired with available labor pools are also helping to bifurcate the more attractive markets from the less attractive ones. Los Angeles, the Inland Empire, northern California, Seattle, New York/New Jersey and Miami markets are considered the top markets. We are also seeing the spread between Class A and Class B assets widen as the mark-to-market/value-add strategy for B product has less certain returns.
NEWSLINK: Are alternative industrial products attracting more investment?
PARSONS: We’re seeing some investors chase returns in alternative industrial subsectors, the hottest of which is the ISF (Industrial Service Facilities) sector. Due to growth in e-commerce, shorter delivery windows, over-the-road trucking regulations and port backlogs, ISFs are an essential part of the supply chain. From the occupier’s needs, the outdoor area is more important than the building area. Traditionally, these have been more owner-occupied or local investors, but the institutional market is flocking to this sector knowing that there are still mark-to-market opportunities here. Since most have minimal building improvements and considerable acreage, they are also an attractive long-term land play. JLL has created brokerage, research and valuation groups to service this niche market over the past 12 months.
NEWSLINK: How has the current environment affected investor preferences?
PARSONS: First, the investor buyer pool has shrunk considerably. However, there’s not many sellers either, as buyers are expecting a write-down and sellers are in wait-and-see mode. If they don’t have to sell, they generally aren’t, meaning that even a reduced buyer pool is leading to deals getting done. The industrial market is still extremely liquid with a lot of dry powder on the sidelines, and funds don’t appear to be struggling with raising capital. There has been a focus on weighted-average lease term, with buyers preferring less than two years remaining on leases to keep rents in line with inflation.
Generally, investors are willing to accept 18-24 months of negative leverage on their investors. Therefore, the spread between Class A and Class B assets widens as the mark-to-market/value-add strategy for B product has less certain returns. We expect the transactions in the fourth quarter to give us more data points.
NEWSLINK: Interest rates and Inflation are buzz words at the moment–how are those affecting the sector?
PARSONS: Interest rate hikes and inflation have impacted the industrial market, like every other commercial real estate sector. The 10-year Treasury is up more than 190 basis points since the beginning of 2022, which, put simply, makes borrowing money more expensive. Developers have pulled back on speculative development plans as they are facing both increased construction costs and increased interest rates on those costs. This led to significant repricing of industrial land in the third quarter and is anecdotally impacting pending deals and properties on the market, though we haven’t seen the transaction volume to quantify the impact to values.
This doesn’t just impact those directly investing in or building industrial buildings, however. This impacts occupiers, as companies reduce inventory due to high carrying costs. This could have a cooling effect on the leasing market, though this may be partially offset by a move toward on-shoring or near-shoring. Logistics operators, carriers and trucking companies could also be impacted by these higher costs of capital, and they already operate on fairly thin margins made thinner by rising fuel costs.
We expect the transactions in the fourth quarter will give us the data points needed to quantify the impacts of both external factors. Market participants are also very interested in what the Fed will do in their November meeting and are hedging for further impacts to their year-end valuations.
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