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Are Industrial Values Getting Too High?

April 16, 2018

 

 

Are Industrial Values Getting Too High?

Over the last few years, investor interest in industrial real estate has risen to a fever pitch. Rent growth and cap rate compression are propelling investor interest in industrial properties, according to David Bitner, head of Americas capital markets research with real estate services firm Cushman & Wakefield. He notes that industrial asset values, including capital and appreciation, grew by 13.1 percent in 2017 alone, compared to 7.0 percent overall for all other commercial real estate sectors. Nationally, the average cap rate on deals involving industrial assets is 5.4 percent for class-A+ product, down from 5.6 percent in mid-2017. That figure, however, is significantly lower in gateway and popular secondary markets. According to a Cushman & Wakefield ‘s latest survey, the cap rate is just 3.8 percent in Los Angeles, the Inland Empire and Orange County, Calif. and 4.0 percent in Seattle. “With strong demand in primary markets, there’s been a shift (by investors) to development,” Bitner notes. “While we’re seeing a step-up in construction, over time it will slow down, because developers are running out of land.” The gap between new supply and demand narrowed in the first quarter of 2018, with 32 million sq. ft. of new space completed. The new supply has been rapidly absorbed by users—particularly e-commerce companies—in the race to claim modern distribution space, but still was not enough to satisfy new demand, which totaled 42 million sq. ft. “Sentiment is so strong for industrial, investors are willing to pay the low cap rates,” Bitner says, pointing out that institutional and foreign investors remain active in primary markets, but high pricing and low yields have forced most private investors out. Institutional investors are willing to pay high prices for low-yield real estate because they are in for the long term and view these investments from a portfolio standpoint, he notes. In fact, “for every $1 invested, there’s $5 chasing it,” Bitner says. He adds that institutional and foreign investors still gravitate toward eight or nine gateway markets, but he expects to see more liquidity for industrial deals in secondary and tertiary markets in the coming years. The trend already seemed underway in 2017. A report from real estate services firm CBRE noted that in the first quarter warehouse space availability tightened in secondary and tertiary markets. Mark Glagola, senior managing director with real estate services firm Transwestern, cites Las Vegas, Phoenix and Salt Lake City as secondary markets with attractive industrial fundamentals in the West, Pennsylvania’s Lehigh Valley I-78 corridor in the East, as well as Denver and Indianapolis. With the current real estate cycle already moving beyond the typical 10 years, investors may wonder when the boom will wind down. Both Bitner and Glagola say the sector still has leg room, at least for another two to three years. “I personally think commercial real estate is undergoing a paradigm shift,” notes Glagola. “Demand will remain strong, certainly for a couple more years, and I think there’s still opportunities for more upside.” For an investor’s perspective, he concludes, “I wouldn’t be too spooked by the notion of cycle.” (National Real Estate Investor/Patricia Kirk)

 

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Denver Leads the Nation in Attracting Highly Skilled Labor

Denver is attracting highly skilled labor at the fastest rate in the country, according to a new study. In its report, JLL used U.S. Census Bureau estimates to measure the growth of a specific segment of the city's population — adults over 25 with a bachelor’s degree in the region between 2012 and 2016. Denver topped the nation, with that demographic increasing at 22.5 percent during that time. Washington, D.C. was second at 19.9 percent and Philadelphia was No. 3 at 19.7 percent of the top 20 U.S. cities ranked by JLL. "Cities have emerged as the clear residential locations of choice in this market cycle, but not all were created equal in their ability to attract talent," according to the JLL report. Yesterday, it was reported that Colorado is the ninth-best state for millennials, according to a new ranking from Wallet Hub. (Denver Business Journal)

 

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Denver's Average Parking Rates Are High — But Not Nearly as High as Other Cities

Parking in Denver can get pricey — but it's nowhere near as expensive as places like New York, Chicago, Boston and San Francisco. Monthly parking (unreserved) in Denver runs on average $205, 12th out of 40 cities analyzed in a new index from Parking Property Advisors and Parkopedia. The index uses data from more than 650 parking facilities representing more than 300,000 parking spaces in the 40 largest U.S. cities. The Mile High City's average hourly rates — $8 on average — place Denver 10th in the nation. Compare that to New York, where an hour costs upwards of $27 on average, by far the highest rate in the nation. Chicago and Boston are next, at $17 and $16 per hour, respectively. And then there's the average daily rate, where parking in Denver stands, on average, at $17 (yes, the same price to park for a single hour in Chicago), while New York's average going rate is a staggering $42.25 a day. For people wanting to reserve a monthly spot (again, unreserved) in New York, it will cost $616 on average. That's nowhere close to those even just seeking reserved parking (a dedicated spot) in Denver, where the average rate is $255. St. Louis and Louisville consistently ranked among the cheapest for parking. (Denver Business Journal)

 

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Food Halls Lure Shoppers to Malls

Mall owners have been increasing retail space dedicated to food and beverage, creating new food halls to bring in more shoppers, according to CNBC. A report from Jones Lang LaSalle found that 40 percent of consumers will pick a mall or shopping center based on the restaurants located there, CNBC reports. Younger shoppers tend to bypass traditional fast food chains like McDonald's and Wendy’s, instead preferring new brands like Sweetgreen, Bareburger and Cava Grill, per CNBC. "Every landlord today is thinking about increasing the percentage of [gross leaseable area] to food," Naveen Jaggi, JLL’s head of retail advisory business in the Americas, told CNBC. "The old model of having a food court...it was a precursor to having a food hall." Food halls often include a bar or even a craft brewery, and they tend to feature local restaurateurs to appeal to Millennials looking for authentic dining experiences, per CNBC. Shoppers who eat at the mall spend an average of 35 extra minutes browsing stores compared to someone who doesn’t eat, according to the JLL report. People who stop to grab a bite generate an additional 12 percent of sales throughout the mall, per the report. A study from Cushman & Wakefield projected that there will be 300 or more food halls of 10,000 sq. ft. to 50,000 sq. ft. in North America by 2020, up from about 100 at the end of 2017, Chain Store Age reports. Millennials are driving the trend, as young adults spend 44 percent of their food budget eating out, per Chain Store Age. Garrick Brown, national retail research director at Cushman and Wakefield, told CNBC that food halls are ecommerce-proof because they offer a “definitive” experience that can’t be replicated. "Food halls are about so much more than just real estate," Garrick Brown told CNBC. "No other retail category has generated as much aggressive expansion over the past few years as food-related retail.” The number of food halls in the U.S. grew 37 percent in 2016 and the trend has expanded out of saturated cities like New York and Los Angeles and into new markets like San Antonio, Texas, and Lexington, Ky., Eater reports. Some critics of food halls have complain that spaces are too crowded, lines are too long and there’s a lack of ambiance and general overload with too many dining options, per Eater. For malls looking to add attractive food options, paying extra attention to the atmosphere would pay off, Ami Ziff, director of national retail sales at Time Equities, told CNBC. A mall owner could see a return on investment in several different areas. "I can't tell you exactly how you're going to make money, but if you spend more money on renovations and create a better ambiance...we feel strongly more people will shop there, and sales will rise," Ziff told CNBC. "And as sales rise, rents rise, and you can increase tenant retention." (Denver Business Journal)

 

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CURRENT

1 MONTH PRIOR

1 YEAR PRIOR

FED TARGET RATE

1.75

1.50

1.00

3 MONTH LIBOR

2.34

2.12

1.16

PRIME RATE

4.75

4.50

4.00

10 YEAR TREASURY

2.82

2.80

2.24

30 YEAR TREASURY

3.03

3.05

2.89