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Despite a Steep Drop in Volume, Industrial Remains the Shining Star of the CRE Universe

The overall slowdown in investment sales activity that affected all commercial real estate assets in the second quarter is not expected to leave a lasting mark on industrial real estate.

The industrial sector has been deemed one of the top performing commercial real estate asset classes, due to low vacancy rates, rising rents in some markets and positive net absorption.

But despite solid fundamentals, investment sales volume in the sector decreased by 50 percent in the second quarter compared to the year before, to $10.3 billion, according to data firm Real Capital Analytics (RCA). According to David Bitner, head of Americas capital markets research at real estate services firm Cushman & Wakefield, in his team’s tally, industrial deal volume was down by about 43 percent in the second quarter compared to the same period in 2019 From the first quarter of 2020 to the second quarter, there was a 46 percent decline in industrial sales volume, he adds. Bitner attributes this to the slowdown in investment activity caused by the coronavirus pandemic beginning in March, as most deals across every property type went into freeze mode.

“We were already anticipating a slowdown on the industrial side pre-COVID-19. People were ready for that. But coming into the downturn, we were in such a fundamentally better place than in previous downturns,” says Carolyn Salzer, director and head of industrial research for the Americas at Cushman & Wakefield. “Rents are still growing… The market is a lot smarter this time around, and with the e-commerce acceleration, it’s causing such a strong demand in the industrial market.”

Net asking rents on industrial properties rose by 100 basis points quarter-over-quarter and 6.3 percent year-over-year to $7.96 per sq. ft. in the second quarter, according to research from real estate services fir CBRE. Rents on warehouse and distribution center properties rose by 5.6 percent year-over-year to an average of $6.68 per sq. ft. These rates are at all-time highs, according to CBRE research.

As a result, Bitner says not all deals stalled and the deal pipeline has increased, particularly as the debt markets opened back up in May. For example, this month, VEREIT announced the acquisition of a 2.3- million-sq.-ft. distribution and warehouse facility in Dallas leased to an investment-grade home improvement retailer. The property was acquired at a purchase price of $246.7 million. Private equity giant the Blackstone Group has also been picking small industrial portfolios here and there. This is happening as companies such as Amazon, Target and Lowes are moving up plans to add industrial space, as they work to stay ahead of consumer demand. The second quarter of 2020 marked the 41st consecutive quarter of positive net absorption in the sector.

“As more goods are getting sold through e-commerce rather than through retail, that certainly has been a negative for a lot of retail establishments, but it has been a positive for warehouse,” says Rich Kleinman, managing director of research and strategy with LaSalle Investment Management. “E-commerce has been a big tailwind for industrial demand for years and that’s only been supercharged in this freezing period, when more and more people started relying in e-commerce to buy goods as well as groceries.”

Prices on industrial assets grew by 1.7 percent quarter-over-quarter and 7.6 percent annually. While this is the fastest rate of any sector, property price growth in the industrial market has been unwinding since the middle of 2019. A year ago, industrial prices were rising at around 12 percent annually, according to RCA data.

“Industrial has really been, I’d say, the most active segment of the core commercial real estate market and that’s been driven by the strong fundamentals we’ve seen in that sector,” says Kleinman. “It’s pretty positive for the sector relative to other sectors of the core commercial real estate market.”

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