Colliers: Interest Rate Volatility Could Hit Industrial Sector

Industrial sector cap rates have compressed to record lows in recent quarters, but Colliers International, Toronto, reported interest rate volatility has caused some investors to pause new projects and could increase cap rates.

In a research brief, Colliers National Director of Logistics and Transportation Solutions Jack Rosenberg noted cap rates for industrial investments have started to increase and sale prices per square foot started to dip. Some projects currently under contract have been asked to change terms in the buyer’s favor, he said.

“The big question is how this change in the capital markets could affect rent,” Rosenberg said. “If the economy avoids a recession, the slowing of new development will increase competition for space and rents will continue to soar. On the other hand, if demand slows because of a recession, then rents could stabilize or even drop.”

In a recent capital markets update, Colliers Vice Chair and Industrial Lead for U.S. Capital Markets Mike Kendall noted increased borrowing costs have caused the industrial market to slow. “Deals are still getting done, though they are taking longer than before, and the buyer pool has gotten shallower,” Colliers said.

Investors today prefer shorter-term leased assets to capture the market’s strong rent growth in recent years, Rosenberg said. “This is allowing some deals to still pencil despite negative leverage. Many are predicting this slowdown to be temporary, and once interest rates settle and lenders are pricing debt with more predictable spreads, investment activity will pick up,” he said. “For the time being, sellers are likely to face a price adjustment, with lower achieved per square foot metrics and higher cap rates compared to recent quarters.”

Colliers National Industrial Research Director Amanda Ortiz said the outlook for industrial property net operating income growth remains strong with rising rents, which should drive more capital to real estate. Sales volume has slowed over the last two months, but the price per square foot continues to climb, she said.

“The industrial real estate wave may have reached its historic swell for the foreseeable future, but there still remains a swirl of activity–and more to be had–once interest rates and economic uncertainty subdue,” Rosenberg said.