Industrial’s success wasn’t confined to just one segment of the market — every segment, from logistics warehousing to manufacturing and flex product properties posted strong occupancy gains last year. Industrial rents also rose in 2016, increasing 3.9% in Q4 from last year’s levels. Cushman & Wakefield’s report shows 61 of 79 markets experienced industrial rent growth, and on the national level every industrial property type is enjoying rising rents.
Experts predict other fundamentals to stay steady throughout 2017. CBRE Head of Industrial Research in the Americas, David Egan, told Bisnow he expects the supply chain that forms the backbone of industrial real estate to continue to deepen as firms like Amazon keep pushing to set up warehouses closer to customers. That’s a fundamental that isn’t likely to change, said Egan, and he expects it to continue to support industrial real estate.
While many experts predict industrial to do well in 2017, there are some who think the sector is due for a slowdown after such a prolonged period of growth. Egan explains some industry executives think industrial is headed for a plateau, but not due to weak demand or economic factors. He told Bisnow, “So many users have been actively in the market for so long, but there’s going to be a point where they’ve managed to employ their strategy, and demand will slow down. This is not because the market is bad; users will simply be satisfied with the supply chain and real estate decisions they’ve made, and will wait and see what happens.”
While the fundamentals look set to continue industrial real estate’s growth, there are things owners can do to make sure their properties are still attractive to tenants should the sector hit a plateau.
The deal involved 19.8 million square feet of industrial space, mostly in older urban properties, and each property averaged about 110,000 square feet. Experts told the Wall Street Journal Cabot’s ability to sell the whole portfolio in one deal is significant, noting only a few years ago this trade probably wouldn’t have happened as investors were much more interested in massive distribution centers outside of cities.
In addition to urban warehouses becoming more attractive to tenants, the sales price indicates another shifting trend: the price difference between urban and rural warehouses is shrinking. The urban properties Cabot sold have typically traded at higher capitalization rates, usually between 1.5% and 2% higher, but in this deal they traded only 1% above modern rural facilities. While the transition is in line with retailers’ fundamental desire to extend distribution networks by grabbing properties closer to customers, the rise of urban warehouses is a new trend that is expected to gain momentum this year.
Build-to-suit is also becoming more important to tenants. Prologis recently said its 2016 build-to-suit starts jumped 15% above 2015 levels. This demand driver is set to grow in importance as Internet of Things technologies continue to make industrial real estate smarter while becoming more important for tenants.
Industrial real estate’s fundamentals are strong, making most experts agree the sector is poised for another year of growth. Yet tenant needs are evolving, and if the sector is set for a slowdown, owners who focus on built-to suit starts, the emerging importance of urban properties and keeping properties up to date with the Internet of Things technologies will be the best positioned this year.