As the industrial market sees some cooling from pandemic-era highs and financing tightens, what should owners and investors expect over the next 12-18 months? Four national experts took the stage at I.CON West to discuss what lies ahead for this popular asset class.  

Capital Raising is Down, Cash is King 

Overall, institutional capital raising was down 30-40% in 2023. Institutional investors have been wary of open-ended funds, portfolios have been trimmed and deals are happening increasingly in cash. Considering the current lending environment, more investors prefer unlevered deals.  

“I’m always surprised how many groups out there are willing to buy all cash,” said Christy Gahr, director of capital markets, North America, Realterm. “It’s taken off over the last year, especially when the cost of debt is 6%.” 

The private equity market is active, and panelists said they see more investment coming from end users. On the debt side, banks are shying away from speculative development projects and focused on smaller transactions last year. Some investors are taking more of a “rifle shot” approach by focusing on targeted, specific projects rather than casting a wide net. There is also interest from life companies that have some liquidity to invest in stabilized industrial product in first-tier markets. 

Not Much Distress, But More Scrutiny 

PJ Charlton, chief investment officer, CenterPoint Properties, commented he wasn’t seeing much distress and certainly not at 2009 levels. However, there are motivated sellers. It is a suitable time to sell assets out of a fund due to the high leasing rates and spectacular rent growth. “Most sellers today have a reason,” said Tim Walsh, chief investment officer, Dermody, “whether it’s a balance sheet-motivated, whether it’s related to some sort of tax structuring or promises they’ve made to investors.” 

What has changed over the past 2-3 years is the approach of investment committees. “Back then it was about aggregation,” said Charlton. “It was all in on industrial… rents were growing 15% a year, cap rates are down another 50 basis points. Interest rates are 3%…  Investment committees are reading every page and scrutinizing every word now. It’s a much more discerning buyer than it was three years ago,” he said. Investment committees are focusing on projects in healthy rent growth markets such as New Jersey, Los Angeles and Miami with $50-$150 million deal ranges.  

“There is a thesis that there’s a slowdown in developments in all our markets,” said Walsh. “Everyone sees it. There are some submarkets where there weren’t any groundbreakings in the first quarter.” However, there will be an overall return to a balanced supply and demand dynamic. 

Embracing ESG 

Investors and tenants are increasingly recognizing the importance of ESG, and the panel agreed bigger credit and quality tenants tend to be more environmentally focused. Dermody has increased its environmental standards, making sure each of their building roofs can structurally support solar panels and installing piping and wiring the parking lots for electric charging. “There is a lot of noise out there when it comes to NIMBYism,” said Walsh, “And I think we need to do more to promote the modern environmentally sensitive product that we’re all building.” 

Additionally, power supply is becoming more of a concern. “Several years ago, everyone was talking about having the right amount of parking. Now the hot topic is having access to power supply,” said Charlton. Several Fortune 500 companies, including FedEx, have promised to reduce their carbon footprint quickly and that means access to electrified parking. “What we’re seeing is that parking is even more important because now you have fleets that need to be able to charge two or three times a day in last-mile distribution facilities,” said Gahr. “It will change aspects of how we invest and how we underwrite and think about what our properties need to be able to provide our users.”  

Nearshoring and Onshoring  

Jack Fraker, president and global head of industrial and logistics capital markets for Newmark, turned the discussion to what is happening near the U.S.-Mexico border and asked the panelists what they are seeing in terms of nearshoring. Gahr commented that so much has changed in a short period and cited several statistics. For example, since 2019, China alone has invested in more than 120 projects in Mexico and in over 18 million square feet of industrial space. U.S.-Mexico trade is now outpacing U.S.-China trade by more than 40%.  

“During the first half of 2023, $461 billion of goods passed through the U.S.-Mexico border, which is 44% higher than the value of goods between U.S. and China,” said Gahr. More than 150 foreign companies said in 2023 that they will open a new operation or expand into Mexico. These sectors include automotive, energy, manufacturing and IT.  

Texas cities Laredo and El Paso were identified as active border markets, and the panelists agreed the best-performing assets are going to be as close to the border as possible. In 2023, El Paso had over three million square feet in total net absorption with a market wide vacancy of less than 4%, according to CBRE. The panelists also discussed the tremendous amount of opportunity in Mexico, although many U.S. development companies have not yet chosen to invest there. Onshoring activity, such as a Samsung project in Austin, is also on the rise. 

Overall, the panel remained optimistic about investments, the economy and interest rates. Unemployment is below 4% and the economy is still growing. Additionally, the level of capital that’s sitting in money markets right now is “at $6 trillion – and that’s $2 trillion higher than it was five years ago,” according to Walsh. “So, the giant pile of money persists. And it’s available as soon as people are comfortable coming off the sidelines.” 

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Announced today, a new Centre for Doctoral Training (CDT) has been funded by a grant of over £9 million from the Engineering and Physical Sciences Research Council (EPSRC) to help train the next, diverse generation of research leaders in data visualization.

A collaboration between City, University of London and the University of Warwick, the EPSRC Centre for Doctoral Training in Diversity in Data Visualization (DIVERSE CDT) will train 60 PhD students, in cohorts of 12 students, beginning in October 2025. The set-up phase will begin in July 2024.

The funding announcement is part of a wider UK Research & Innovation (UKRI) announcement of the UK’s biggest-ever investment in engineering and physical sciences postgraduate skills, totalling more than £1 billion.

DIVERSE CDT will be supported by 19 partner organisations, including the Natural History Museum, the Ordnance Survey, and the Centre for Applied Education Research.

Data Visualization is the practice of designing, developing and evaluating representations of complex data – the kinds of data that lie at the heart of every organization – to enable more people to make real-world use of a source of information which is otherwise challenging to access.

Data visualization can be used to synthesise complex data into a clear story upon which actions can be based. From illustrating how the Covid-19 pandemic made countries poorer, to showing how the processing-power of cryptocurrencies may have driven up the price of high-street graphics cards; data visualization is crucial to society obtaining meaning from data.

However, no current CDT focuses upon training its students in data visualization. This is despite government’s Department of Digital, Media, Culture and Sport listing data visualization as one of the top five skills needed by businesses – with 23% of businesses saying that their sector has insufficient capacity. Likewise, Wiley’s Digital Skills Gap Index, 2021, listed data visualization as the third most needed business and organisational skill for employees to succeed in the workplace in the next five years.

Key innovations of DIVERSE CDT will include students:

Credit: Alex Kachkaev and Jo Wood, City, University of London

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By a show of hands, I.CON West keynote speaker Christine Cooper, Ph.D., managing director and chief U.S. economist with CoStar Group, polled attendees on their economic outlook – was it bright or bleak? The group responded largely positively, with most indicating they felt the economy was doing better than not.  

Four years ago, the World Health Organization declared COVID-19 a global pandemic, seemingly halting life as we knew it. And although those early days of the pandemic seem like a long time ago, we’re still in recovery from two of its major consequences: 1) the $4 trillion in economic stimulus that the U.S. government showered on consumers; and 2) the aggressive monetary policies that have created ripple effects on the industrial markets. 

Cooper began with an overview of the economic environment, which she called “the good news.” The nation’s GDP is strong, and the economy gained momentum in the second half of 2023 – we saw economic growth of 4.9% and 3.2% in Q3 and Q4 respectively — much higher than expected. “The reason is consumers,” Cooper said. “When things get tough, we go shopping. This generates sales and economic activity. But how long can it last?” 

Consumer sentiment continues to be healthy, and employment is good, although a shortage of workers could impact that moving forward. The U.S. added 275,000 jobs in January, far exceeding expectations. “The Fed raising interest rates hasn’t done what it normally does – slow job growth and the economy,” said Cooper. In addition, the $4 trillion given to keep households afloat during the pandemic has simply padded checking accounts, she said, as consumers couldn’t immediately spend the money because everyone was staying home, and the supply chain was clogged. The money was banked, and there’s still a lot of it to be spent. 

Cooper addressed economic risks and the weak points that industrial real estate professionals should be mindful of right now, including mortgage rates that remain at 20-year highs, stalling the housing market, particularly for new home buyers. Mid-pandemic years of 2020-2021 had strong home sales, driven by people moving out of the city or roommates dividing into two properties for more space and protection against the virus. Homeowners who refinanced in the early stages of the pandemic were fortunate and aren’t willing to list their houses for sale quite yet. 

“The housing market is a big driver of industrial demand – think furniture, appliances and all the durable goods that go into a home. This equates to warehouse space demand,” said Cooper. 

Interest rates on consumer credit are spiking and leading economic indexes are still signaling a recession ahead. Financial markets are indicating the same, with a current probability of 61.5% that we will be in a recession by 2025. However, Cooper said, while all signs point to a recession, economists everywhere say the same thing as the economy seemingly continues to surprise us: “This time is different.” 

Consumers are still holding the economy up with solid job and wage gains, yet higher borrowing costs are weighing on business activity and the housing market. Inflation has eased meaningfully but remains a bit too high for comfort. We’ve so far avoided the recession that everyone predicted, and the Federal Reserve appears ready to cut rates this year.  

For the industrial markets, the good news is that retailer corporate profits are beginning to bounce back after slowing in 2021 and 2022, with retail sales accelerating.  

A slowdown in industrial space absorption was reflected in all the key markets – Atlanta, Chicago, Columbus, Dallas-Fort Worth, Houston, the Inland Empire, Los Angeles, New Jersey and Phoenix – but was worst in the southern California markets, which have since been rebounding.  

“Supply responded to strong demand,” Cooper said. “In 2021, 307 million square feet were delivered, followed by 395 million in 2022. In 2023, we saw 534 million square feet delivered – that’s almost 33% higher than the year before.” 

The top 20 markets for 2023 deliveries measured by square feet are the expected hot spots: Dallas-Fort Worth (71 million square feet) leads the pack by almost double its follower of Chicago (37 million), then Houston (35 million), Phoenix (30 million) and Atlanta (29 million). Measured by share of inventory, emerging markets like Spartanburg, Pennsylvania, topped the list at 15 million square feet, followed by Austin (10 million), Phoenix and Dallas-Fort Worth (7 million), and Columbus (6 million). 

“Developers are more focused on big box distribution projects, and 90% of what’s being delivered is 100,000 square feet or more,” Cooper said. Around 400 million square feet of space currently under construction is unleased, in addition to the around 400,000 square feet that remained unleased in 2023. “Putting supply and demand together, industrial vacancy rate is rising and could peak at 6-7% in 2024,” she said. 

In conclusion, Cooper said that industrial real estate is rebalancing from its boom-and-bust years. Pandemic-related demands and accelerated e-commerce growth created a surge in 2021 and 2022, and the strong supply response that began in 2022 will continue to unfold through 2024. With rising interest rates putting a damper on demand in 2023, vacancies began to move higher and will continue to rise this year.  

“Consumers are spending and will continue to do so, and interest rates are likely to fall this year,” said Cooper. “We can hope for a recovery from the full effects of the pandemic in 2025.” 

This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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