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Special Report

Industrial Investment Forecast

National Report 2018

The rise of online shopping and faster delivery times are fostering significant demand for industrial properties near...

National Industrial Index (NII)

  • The rise of online shopping and faster delivery times are fostering significant demand for industrial properties near ports with the capability to handle today’s most cutting-edge distribution strategies.
  • Tampa-St. Petersburg (#6) registered the greatest leap in the Index, jumping seven places as booming rents and benign construction push vacancy to one of the lowest levels in the country.

National Economy

  • The tight national labor market and surging confidence are invigorating consumption, spurring increased demand for goods and distribution. Heightened wages this year should continue to energize consumer spending, placing additional pressure on supply-chain logistics and encouraging higher inventory levels for retailers.
  • The rapid expansion of online shopping is driving a structural shift in the industrial sector, leading to an adjustment of space requirements and property locations for retailers and third-party logistics providers. Businesses are increasingly demanding to be nearer to their final customer, turning some vacated big boxes into last-mile fulfillment centers.

National Industrial Overview

  • Record-low vacancy and new demand drivers pushed development activity to a cycle high in 2017 with the completion of more than 240 million square feet.
  • Industrial demand will remain strong this year as businesses continue to expand into warehousing and distribution space, pushing net absorption past construction to compress vacancy 30 basis points. This year will mark the second consecutive year that supply growth surpasses 200 million square feet.
  • This year, construction has been concentrated in a handful of shipping and logistics hubs with Riverside-San Bernardino leading the way, followed by Dallas/Fort Worth, Atlanta, Chicago, Phoenix and Houston.
  • The national vacancy rate compresses 20 basis points to 4.9 percent by year end on net absorption of just over 200 million square feet. A tightening market is forecast to boost the average asking rent 6.6 percent this year, down slightly from the 8 percent acceleration recorded in 2017.

Capital Markets

  • Debt availability for industrial properties remains elevated, with a range of lenders catering to the sector. National banks will continue to serve a significant portion of larger industrial deals while local and regional banks target smaller transactions in secondary and tertiary markets.
  • Average industrial cap rates have dropped to the low-7 percent range over the last three years, with a yield spread above the 10-year Treasury between 430 and 470 basis points. Many investors believe cap rates will rise in tandem with interest rates, but that has not been the case historically.
  • The 10-year Treasury note yield neared 3 percent in February to mark the highest rate in years, pointing to strong economic data and diminished investor fears over the strength of the post-crisis recovery.

Industrial Investment Outlook

  • Continued economic growth drove the expansion of the industrial sector in 2017, leading to a rise in deal flow for the year. In 2018, demand from the growing e-commerce segment and adjustments among retailers and manufacturers to improve supply chains have elevated investor sentiment.
  • The desire to diversify portfolios and obtain higher yields will be a substantial driver of property sales. As vacancy and rent growth remain robust in industrial strongholds such as the Inland Empire and Dallas/Fort Worth, other markets will stand out for their robust economic fundamentals and greater affordability.
  • The stabilization of cap rates across many regions along with a rising interest rate environment are anticipated to narrow spreads, though investment sales are not likely to be largely impacted as investor demand remains high.

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