Speed Bumps Ahead for Industrial Assets Don’t Diminish Investor Appetite – NREI

New research predicts a slight softening in demand for industrial space going forward.

Slowing economic growth, trade wars and a pipeline that is delivering new supply to the market may force investors to adjust return expectations for industrial properties, but it doesn’t appear to be putting much of a dent in buyer demand.

Industrial has edged out multifamily as the favored asset class and there continues to be abundant capital targeting the sector as investors expand allocations. In fact, industrial property transaction volume jumped 32.6 percent last year to a cyclical high of $97.7 billion, according to research firm Real Capital Analytics (RCA). Yet a new industrial real estate forecast from Deloitte suggests that investors may need to brace for slower growth ahead.

Deloitte is predicting that the annual demand growth rate, although still positive, will likely decline over the next three years to a little below 0.9 percent—nearly one-half of 2018 levels. Specifically, Deloitte expects the vacancy rate to rise from 7.0 percent in 2018 to 10.3 percent by 2023. Some of the factors that will weigh on occupancies and demand for space include the rising cost of capital, new supply and new space alternatives, such as aggregators that offer on-demand warehouse space for seasonal needs.

“It’s not that our model is saying there is real trouble here,” says John D’Angelo, managing director and real estate leader at Deloitte Consulting. It’s just been such a hot sector for so long that finally supply is catching up to demand and there might be some signs that demand is tempering. “Like what we have seen happen with multifamily earlier, returns were so great that at some point they had to level off a bit, and that’s what we’re calling for in the near- to mid-term for industrial,” he says.

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Article by:
Beth Mattson-Teig | Jun 18, 2019