The industrial asset class is, in short, as active as it has ever
ARE THOSE CLOUDS?
Recently, though, clouds have emerged on the horizon that could
turn into headwinds for the sector. In many markets, supply—both
new and renovated—is finally showing signs of catching up with the
seemingly inexhaustible demand. Also, as global trade tensions
heighten, it is increasingly likely that industrial operations will be
Traditionally, imports have been the biggest driver of demand
for the industrial sector, so anytime there is concern about a trade
war, the sector needs to closely monitor the situation, says Sean
Spellman, chief development officer for CA Ventures. “While it
doesn’t appear the trade war will escalate much further, if it did, the
traditional ‘path of goods’ markets like Chicago, Dallas and Atlanta
would certainly see weakness—at least until those issues are
resolved,” he says.
There are some remediating factors: for starters as Spellman
notes, imports actually grew since recent trade disputes escalated
last year. Also, e-commerce is just as strong a driver behind industrial activity as is trade.
The new supply too represents a double-sided sword for the sector. While it is answering demand, some of the product is not up to
the satisfaction of buyers.
“It’s tough to find good deals in a market that is saturated with
average supply,” says Jimmy Ullrich, a director at Stan Johnson Co.,
There are too many buyers chasing too few high-quality deals. And
when a quality deal hits the market, savvy investors will snap it up
immediately. Some deals are even trading off-market in today’s
He saw similar trends back in 2005, although leverage levels are
lower today, but regarding price, he says there is downward pres-
sure caused by the abundance of capital, and pricing can easily get
distorted. “There remains a disconnect in buyer-seller expectation,
and until that gap gets smaller, it’s tough for a prudent investor to
wade through these waters,” Ullrich says. “If you dig deep into the
inventory though, there are certainly great deals to be made.”
A POSITIVE FORECAST
While fundamentals in the industrial asset class may be shifting in
some respects, the sector’s outlook remains bright.
In a recent 2019 outlook called Confidence in Uncertain
Times, analyst firm BTIG asserted a positive outlook for the industrial REIT sector based on constructive supply and demand fundamentals and expected positive estimate revisions. Since then,
industrial REITs have outperformed the overall REIT industry. In
fact, BTIG expects industrial REITs to outperform through the
balance of 2019 and into 2020 and in April, had even raised its
price targets for buy-rated companies like Prologis, Duke Realty
and Terreno Realty.
And even though fundamentals are starting to even out,
demand still remains strong, Spellman says. Barring an economic
downturn, he says, there is minimal risk of supply swamping
demand and dramatically pushing up vacancy rates. “Altogether,
we anticipate rents to continue to grow as demand outpaces supply into 2020.”