2019 Industrial Investment Report
National Report, 2019
Special Research Report
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Southern California markets dominate the top 10 in this year’s Index. Twin Ports Los Angeles is one of the busiest ports in the world and the metro also has an expansive manufacturing base, underpinning a robust industrial sector.
Milwaukee (#13) registered the greatest improvement in the 2019 NIPI, leaping six rungs. Strong manufacturing hiring and minimal new inventory will fill existing space, dropping vacancy and boosting rents. Cleveland (#7) and Atlanta (#14) followed, each climbing four spots.
Economic growth will extend into 2019 as employers add 2 million workers to payrolls this year, keeping the nation’s unemployment rate near 4 percent. Though many are eager to expand employment bases, a lack of qualified workers may inhibit them from filling open positions.
The U.S. economy will remain fundamentally stable in 2019 despite consumer confidence dipping from last year’s historically high levels. All-time highs of U.S. household wealth and disposable income will keep consumers optimistic, particularly as several factors could threaten domestic growth moving forward.
National Industrial Overview
The transformation of the industrial sector has accelerated to an unheard of pace as online shopping blurs the lines between retail and industrial properties. Shifting consumer habits are rewiring the sector in the digital age as e-commerce sales grew by 13.5 percent last year, to now account for roughly 10 percent of overall retail sales.
Demand for industrial space climbed past supply growth for the ninth straight year in 2018 as e-commerce and last-mile delivery motivate companies to locate closer to the end consumer.
Tenant demand pushes past supply growth for the tenth consecutive year, compressing the national industrial vacancy rate to 4.5 percent, the lowest on record. Supply constraints support another year of healthy rent growth, climbing 4 percent this year to $7.27 per square foot after recording a 5.4 percent increase last year.
High-profile distribution facilities and warehouses in urban areas remain a portfolio staple, with loan-to-value (LTV) ratios in the 55 to 75 per-cent range, depending on borrower, asset and location factors. Non-core locations and use cases typically require more nuanced financing such as mezzanine and bridge loans to undertake capital improvements.
Following the implementation of tariffs on several key trading partners, core inflation has remained just above 2 percent, showing little impetus for an uncontrolled surge. Muted inflationary pressure has given the Fed more maneuvering room, particularly as international pressures weigh on sentiment.
Industrial Investment Outlook
An abundance of equity capital was ready to establish or expand into the industrial property market last year, intensifying investor competition and placing upward pressure on asset values. Pricing across the country remains near or above all-time highs, while gateway markets like Los Angeles are recording the tightest first-year yields and the highest prices.
Urban infill properties will remain a top target among investors as e-commerce and last-mile demand push tenants closer to the end consumer. Challenges faced in retail are presenting investors with opportunities to convert vacated big-box stores into smaller distribution centers that can serve the local market, particularly with minimal supply growth for infill space.
The average cap rate compressed to the upper-6 percent territory, a record low, as demand continues to outpace new supply. Class A properties in some of the nation’s primary markets have achieved a cap rate closer to 4 percent, motivating buyers to seek higher yields in secondary and tertiary markets.