Last mile industrial facilities continue to be a favorite among institutional investors, who like the low vacancy levels and high rental rates these facilities command due to high demand from e-commerce. Everyone seems to be on the hunt for warehouses near large population centers and close to end users, but dense urban markets where land zoned for industrial is in short supply and property values are at a premium. So where is the sector to go next? Up. Multi-story warehouses are already common in Asia, but the concept is now taking off in supply-constrained American cities.
By Amanda Moore, Managing Consultant, Houston
Harris County, Texas has released the vast majority of their 2018 notice values for commercial real estate. They’ve come out especially strong in the industrial sector with warehouse properties seeing a 12% increase over the 2017 certified values and a 6% increase over the 2017 noticed values.
Harris County says Houston is becoming an “industrial hub” due to the rapid growth in e-commerce driving high demand. The county points to flat vacancy rates at 5% and increasing asking rental rates to support their position on the warehouse market. Of the 6.4 million SF of warehouse product under construction, 29.3% is pre-leased. The price at which warehouse product is trading is also increasing - $77 PSF vs. $67 PSF in the prior year. Port of Houston is emerging as a key national distribution region, further fueling the fire for increasing warehouse values with decreasing cap rates YOY.
By Carlos Villatoro, Senior Managing Consultant, Dallas
A prominent national industrial REIT client recently asked for a historical summary of property taxes for a distribution warehouse they were considering purchasing. We were alarmed to see the property had experienced seven consecutive years of significant increases and had already budgeted for another increase in the upcoming year. Unfortunately, this trend is not specific to that one property alone. By 2020, I will not be surprised if we will have seen a decade of continual property tax increases for nearly all industrial properties across the Dallas-Fort Worth (DFW) area. In order to minimize and manage these increases as much as possible, it’s crucial to understand why and how they are happening in the first place.
- Industrial activity will continue to thrive. There is no indication of a slowdown in this sector for 2018, says Peter Muoio, chief economist at Ten-X. During the latter part of 2017, new demand drivers, including e-retail warehouse distribution and fulfillment space, cloud computing and facilities for legalized cannabis, supported much of the demand in the segment. However, Muoio expects there to be an increased demand from traditional users of industrial space, such as industrial production companies.
Continued growth in e-commerce has driven industrial vacancy to an all-time low, declining by 70 basis points from a year ago to an aggregate nationwide vacancy of 5.6 percent in the fourth quarter of 2016, according to the year-end industrial market report from real estate services firm JLL. JLL researcher Aaron Ahlburn says that the former record low vacancy was in 2000, when the rate dipped to a 7.0-8.0 percent range as a result of market expansion coming out of the dot.com bubble. Increasing competition for industrial space has caused rental rates to hit record highs, breaking the $5 per sq. ft. triple-net barrier for the first time, Ahlburn notes, and has set off a building boom.
Fueled by the rapid growth of e-commerce, the U.S. industrial market is benefiting from tight supply and rising rents and is expected to enjoy sustained momentum throughout 2017. To track the most in-demand markets, real estate services firm CBRE put together a list of cities and regions with the lowest prime yields on logistics assets. The average prime yield for the U.S. is currently 5.84 percent.
In an effort to keep up with e-commerce distribution demands, developers in New Jersey and Long Island are repurposing vacant suburban office buildings into warehouses. While this conversion seems backwards, as office space costs more to build and usually generates higher rents, the red-hot warehouse market driven by the rise of e-commerce has changed that. Though the numbers are small, several suburban office properties in or near New Jersey and Long Island industrial neighborhoods have been redeveloped as warehouses. Industrial values continue to rise, making the conversion worthwhile for developers.
For some time now, the industry has been mulling when the commercial real estate cycle’s historically-long recovery will end and an economic downturn will begin. By the end of 2018, the economic model created by research firm CoStar Portfolio Strategy predicts an 80 percent chance of a recession, says Rene Circ, director of research at CoStar Portfolio Strategy. Circ points to variables, such as the unemployment rate nearing full employment and business investments down, that are flattening the yield curve and pointing to a recession. Circ also cautions that the Federal Reserve raising interest rates will be a negative to the yield curve. Although the next recession is expected to be milder, the National Real Estate Investor took a look at what asset types are better positioned than others to weather an economic downturn.
The U.S. industrial market is on track for another record year in 2016, and the market could expand well into 2018 despite the possibility of higher interest rates that would increase the costs of carrying inventory, according to global commercial real estate firm JLL. Demand will be powered by the dramatic growth of e-commerce and the fulfillment networks developed and expanded to support it. While e-commerce accounts for only 8 percent of all U.S. retail sales, according to JLL estimates, that figure will undoubtedly rise as traditional retailers begin shifting massive resources that were once reserved for brick-and-mortar investments to the digital world.
As online retailers shift their focus to two-day and same-day package delivery, warehouse builders are beginning to redraw the map of logistics hubs on the East Coast. Historically, the area around the central Pennsylvania towns of Harrisburg and York has hosted large clusters of warehouse space because of light zoning restrictions, access to several large city population centers and ample cheap land to build on. But in the last five years warehouse development in the Lehigh Valley, which is to the north and closer to New York City, has surged, according to brokerage CBRE Inc. Over the weekend, FedEx Ground, broke ground for its largest facility in the country, an 800,000-square-foot automated distribution center in Allen Township, Pa., adding a large chunk of space to the cluster of logistics real estate in the state’s Lehigh Valley area.