If the strong quarterly results from the so-called “800-pound industrial gorilla,” Prologis, Inc. are any indicator, industrial is still a stand-out sector at the end of Q3.
According to Seeking Alpha, Hamid Moghadam, CEO of Prologis Inc., which “operates the largest fleet of modern industrial buildings around the globe,” said of the results, “The operating environment is stronger than I’ve ever witnessed in the U.S.”
Nationally, vacancy declined and net absorption was up from Q2. The Q3 vacancy rate was 6.7% and net absorption totaled positive 76,087,634 square feet, according to CoStar.
On a recent Commercial Real Estate Show, Rene Circ, Director of Research at CoStar Group, said that the midyear numbers for the industrial sector looked so good that it seems that the ‘sexy sector’ is keeping up the pace, leading all the other sectors in rent growth and even sales volume.
Circ was right. According to the Real Capital Analytics Q3’15 Quarter in Review: Lender Composition Report, industrial is the only commercial real estate sector that hasn’t posted a decline in sales volume YOY. In fact, “The sale of significant industrial assets grew 8% YOY in September on sales of $4.6 billion.”
Real Capital Analytics said that while this pace is certainly better than a decline, the sales volume trend for the sector is actually slowing. (In Q1’15, sales grew 104% YOY, down to 43% YOY in Q2 and only 12% in Q3). And, Circ said that flex space, such as combined office-warehouse, isn’t doing as well. Overall, flex is the most vulnerable and is still underperforming. Flex vacancy decreased to 9.1% at the end of Q3. Alternatively, warehouse projects vacancy stood at 6.4%.
Historically speaking, industrial may be cooling off a bit, but if you look at the big picture, industrial is outperforming other subsectors substantially and generally speaking, the outlook is still positive.
PwC and Urban Land Institute (ULI) recently published Emerging Trends in Real Estate 2016®, a trends and forecast publication now in its 37th edition. In a press release, PwC said, “The results of the Emerging Trends survey not only place industrials at the top of the commercial property sector for investment and development prospects, but also posted the highest score achieved for industrial properties in the surveys since 2004. Investors like the value-for-price relationship in a property type where the average cap rate is 6.9 percent, the downside protection afforded by the triple-net leases that are typical in this sector, and the cash-in-hand quality of industrials.”
The sector is also turning in unprecedented rent growth numbers near 6.0% annual noted Circ. “An economy doing well, but not too well, has kept supply in check, and driven tenants’ options,” he said. “During the downturn, smaller buildings suffered disproportionally, and their recovery was very slow. Now small business is strong, creating a resurgence in demand that’s leading the light industrial market. When small business is leasing space, that’s a great indicator for the U.S. economy.”
Nationally, the average quoted asking rental rate for available industrial space was $5.69 per square foot per year at the end of Q3—an increase of 1.1% from Q2, reported CoStar.
Bull Realty, Inc., Research