Industrial, apartments and self-storage are all benefiting from a wave of demand that is resulting in exceptionally low vacancies and strong rent growth. According to Marcus & Millichap, industrial vacancies dropped to 4.0 percent last year, while rents grew by an average of 9.6 percent. “The underlying drivers for industrial remain firmly in place,” Pontius says. E-commerce continues to be a powerful force. In addition, companies are shortening supply chains to bring inventory closer to consumers and reduce risk. Also, current geo-political issues and trade sanctions on Russia could impact supply chains and the desire to maintain larger inventories of goods on hand to ride out any bumpiness in the market, he adds.
Those industrial owners who think it’s a good time to buy assets held firm at 58 percent, while 31 percent consider it a better time to hold and 11 percent to sell [Figure 6].
Sixty-nine percent of investors predict that values will rise in the coming year with an average increase of 7.4 percent expected [Figure 7],
which is the same amount compared to the prior survey. “Depending on how steep the interest rate curve proves to be, cap rates on premium assets could creep higher, but it won’t correlate on a one-to-one ratio with rental growth remaining a key offset,” Pontius says.
Apartment vacancies nationally dipped to 2.6 percent at the end of last year, while rent growth was tracking at 15.5 percent, according to Marcus & Millichap. Some of that rent growth reflects pent-up demand, as many owners did not raise rents during the height of the pandemic in 2020. “There was a certain amount of catch up in the market that occurred in 2021,” notes John S. Sebree, Senior Vice President, National Director of the Multi Housing Division at Marcus & Millichap. However, survey respondents remain optimistic on additional increases in valuations. Seven out of 10 respondents expect values to rise in the coming year with an average increase of 8.6 percent, compared to the 6.7 percent increase anticipated in the prior survey.
At the end of the day, there are two big factors driving the performance for apartments—the shortage of housing and the aging millennial generation that is creating new households, notes Sebree. When the pandemic hit in 2020, many marriages were postponed, and some 20-somethings moved home with their parents. Those trends are reversing, which is driving new household formation and more housing demand. Construction is also facing headwinds, with rising costs and material shortages making it more difficult for supply to keep pace with demand. “There is razor thin availability of rental housing, and I would expect very strong rent growth momentum as we contend with the shortages,” Sebree says. More respondents at 43 percent still consider it a better time to buy apartments, while 40 percent think it is a better time to hold and a minority 17 percent said it is better to sell.
Self-storage is another sector that has posted exceptionally strong metrics. Vacancies improved to 6.6 percent, while annual rent growth averaged 8.5 percent at the end of 2021, according to Marcus & Millichap. Two-thirds of storage owners think values will continue to rise in the coming year, with an average increase of 6.4 percent anticipated.
Storage owners continue to view it as a good time to own storage. More than half (54 percent) said it was a better time to buy, while 40 percent believe it is a good time to hold and a minority 6 percent see an opportunity to sell. “Metrics are very strong. Vacancies are at an all-time low and there is strong momentum for rent growth. New development remains limited compared to recent levels though it is ticking up,” says Steven Weinstock, First Vice President and National Director of the Self-Storage Division at Marcus & Millichap. However, it’s a little surprising that more owners did not express interest in selling, he says. “Many self-storage owners have been in the business a long time and have not seen performance and valuations at such a high level, and it could be an opportune time to take some chips off the table,” he adds.