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Investors Continue to Target Industrial

Because of competition for industrial assets, investors are looking to alternative types of industrial product.

The solid performance and positive outlook for expansion have helped to position industrial as one of the favored property types for investors. Survey respondents rated industrial and multifamily as the two most attractive sectors at an average of 7.4 on a scale of 1 to 10, well ahead of hotels at 5.0 and office and retail each at 4.5.

Industrial sales during the first quarter of 2021 totaled $19.6 billion. Taking disruption from 2020 out of the equation, that volume represents a 11.4 percent increase over the $17.6 billion in the first quarter sales volume that occurred in 2019, according to Real Capital Analytics (RCA).

“Fundamentals are strong in industrial real estate. Vacancies in many markets are at record lows. Demand is very strong from tenants, and rental rates continue to increase. So, I don’t see fundamentals causing investors to shy away from industrial real estate,” says Erik Foster, principal and head of industrial capital markets at Avison Young. “We could see some outside headwinds, such as rising interest rates and inflation that could curtail some of the bullish behavior in the industrial market, but generally, the tailwinds will continue for the remainder of 2021,” he says.

Similar to last year, most respondents (55 percent) say they plan to hold onto industrial assets or buy more (36 percent), while those who plan to sell assets are in the minority at 9 percent. The percentage of respondents who said they plan to buy industrial in the next 12 months has maintained a steady level over the past five years with those respondents who said they plan to buy industrial in the coming year ranging between 33 percent and 38 percent.

Black Creek’s portfolio of industrial assets is giving the firm good insight into operations. “Rent collections were substantially better than any other asset class in real estate, and we had very good visibility into leasing demand given some of our development projects,” says Fazekas. The firm executed 4.4 million sq. ft. of new industrial leases in first quarter, which represents a record high for the firm. That demand is coming from a diverse pool of tenants. “We’re seeing extraordinary leasing activity and demand from tenants right now. So, we’re very bullish on the market,” he says. Vacancies remain extremely low, and it’s really a great time to be an investor in the space, he adds.

The property types most in demand have remained consistent, with warehouse/distribution facilities topping the list at 56 percent, followed by last mile facilities (48 percent) and flex industrial (35 percent). It’s no surprise that warehouse/distribution and last-mile tops the list.

Most attribute that to the Amazon effect and acceleration of e-commerce during the pandemic. “As the brick and mortar retail landscape changes, the distribution and last mile efforts will take their place,” wrote one respondent. Manufacturing ticked higher from 10 percent in 2020 to 14.6 percent in the 2021 survey, followed by R&D at 11 percent. “Changing market dynamics and new opportunities will demand flexible, low cost spaces for new ventures and R&D,” wrote another respondent.

Because of competition for industrial assets, investors are looking to alternative types of industrial product, notes Foster. For example, Avison Young’s industrial capital markets group led by Foster recently was the exclusive advisor for the sale of a transportation-focused portfolio on behalf of CenterPoint Properties.

The portfolio included 53 trans-load and truck terminals in key  markets such as Chicago, Dallas, Atlanta and Philadelphia, and it was purchased by a large institutional investor for approximately $300 million. Demand for logistics real estate is spilling over to these niche sectors, such as truck terminals, as well as areas such as cold storage, he says.