Beat Goes On: E-Commerce, Strong Returns Fuel Bullish Outlook for United States Logistics Investment

Capital From Every Direction Flowing Into Non-Traditional US Circulation Centers as Land Costs, Prices Rise

IDI Logistics just recently offered a 2.2 million-SF portfolio in Ohio and Mississippi to Granite REIT for $122.8 million. Owners are starting to list industrial portfolios in a broad range of US markets.

The industrial realty market’s remarkable development run is continuing into 2018 as web commerce need triggers investors and developers to put more and more capital into logistics portfolios across a growing range of 2nd- and even third-tier U.S. markets.

The push by Amazon and other e-commerce sellers to invest in the “last mile” of their distribution networks to support next- and same-day delivery is driving a burst of advancement and investment activity into smaller warehouse and circulation residential or commercial properties, even as structure and land prices continue to appreciate in traditional seaside U.S. logistics centers.

Despite the boom in storage facility and logistics construction, the U.S. industrial job rate reduced in the 4th quarter of 2017 to 5.1%– lower than in any quarter leading into the Great Economic crisis, according to information presented at CoStar’s recent fourth-quarter 2017 State of the U.S. Industrial Market webcast. In overall, warehouse and distribution tenants soaked up approximately 70 million square in the United States in the last three months of the year, with one-third of that total occurring in the major distribution centers of Dallas, Atlanta, Chicago and Memphis.

While the pace of lease growth is beginning to relieve as new supply comes online, e-commerce need reveals no sign of abating. Amazon has actually signed significant leases just recently in the Inland Empire, CA; Denver, Dallas, Portland and Salem, OR; Philadelphia, Trenton, NJ and Phoenix.

The e-commerce giant’s activity is pressing brick-and-mortar retailers with online shops to compete with Amazon’s fast delivery, with Target, Walmart, JCPenney and Macy’s retooling their omni-channel offerings, either by expanding their circulation footprint or with third-party logistics providers.

“There is an increasing appetite for ‘right now’ shipping alternatives, indicating e-commerce sellers will need to buy more commercial areas to fulfill the demand,” noted Richard Kalvoda, senior executive vice president with Altus Group Ltd, which recently launched findings from its current Genuine Confidence Executive Study. Asked where they expected to see the best returns genuine estate financial investment in 2018, participants provided commercial the greatest allocation for the second year in a row.

Private-equity capital and investors from around the globe are crowding into the unconventionally sexy storage facility sector. Industrial was the only major commercial property type to publish annual sales development in 2017, with total volume edging up 2% from the prior year to $75 billion, even as activity has actually slowed down because reaching record-shattering levels in 2015 and 2016, according to CoStar data.

Many financiers have broadened their horizons after being priced out of main markets. Long gone are the days when San Jose and Phoenix were considered secondary markets.

“As third-party logistics companies and sellers have actually developed out their supply chains to reduce the hazard of disturbances and reach online consumers more quickly, need has increased for industrial buildings of all shapes and sizes,” said CoStar senior handling consultant Shaw Lupton, who co-presented the State of the U.S. Industrial Market report with Rene Circ, director of U.S. commercial research at CoStar Portfolio Method.

Such facilities include extremely functional logistics buildings where online orders are initially fulfilled, midsized sortation centers through which regional shipments pass and last-mile delivery centers positioned to serve local populations in the very same day.

“Financiers are subsequently discovering opportunities to purchase structures leased to credit renters in places that would not typically be thought about tier-one distribution markets,” Lupton added.

With need still chasing after supply in lots of markets, rates of warehouse and other industrial properties keep appreciating, regardless of the moderating sales growth, Circ stated.

Commercial repeat sales grew by an annual 12% in the 4th quarter, almost double the 6.3% growth of the multifamily sector and nearly 3 times the development of the workplace sector index, according to the value-weighted CoStar Commercial Repeat Sales Index (CCRSI) for the last three months of 2017.

Logistics and other industrial property was the only major residential or commercial property type to show development in annual sales volume, climbing up 2% in 2017 from the previous year to $75 billion. While below the record trading volume in 2015 and 2016, the large logistics portfolios that drive sales are have actually resumed trading in current quarters as Blackstone, financiers from China and other buyers have put into the market to scoop up the shrinking supply of for-sale residential or commercial properties.

“Few organizations are over-allocated to industrial,” Circ stated. “Until a few year back, most investors were under designated.”

In the largest offer of the fourth quarter, Blackstone, which returned to the industrial market last year, got a 38-property portfolio totaling 4.4 million square feet in the Southern California cities of Chino, City of Industry, La Mirada and Ontario. The huge private equity company, which purchased the portfolio from Principle Real Estate Investors for around $500 million, or $113.44/ SF, will be an even larger factor in the first quarter of 2017.

Blackstone in January consented to purchase Canada-based Pure Industrial Real Estate Trust, which owns and operates industrial homes across North America, in an all-cash offer valued at about $2 billion. In another large end of the year offer, IDI Logistics offered a 2.2 million-square-foot portfolio in Ohio and Mississippi to Granite REIT for $122.8 million.

“Some big portfolios have actually currently struck the marketplace and others will entering the market this year, so I would not be surprised if 2018 is as strong as last year for the industrial section, in the middle of minor decreases in the other home types,” Lupton stated. “We see really strong interest from our institutional financial investment customers – both the conventional financiers with a performance history, along with customers that would like more direct exposure to industrial. Along with extremely strong leas and earnings development, it continues to drive prices up,” Lupton said.

There are a couple of yellow flags because of the heavy construction in particular markets. Speculative jobs account for a greater proportion of current shipments and projects under building in 2015 and while renting velocity has been excellent, the waters will be checked in 2018 when record levels of new inventory go into the marketplace.

That said, core logistics residential or commercial property capitalization rates were at a lowest level of 4.4% at end of 2017, compared with 4.7% at the peak of the last cycle, Circ said. Nevertheless, the spread between industrial cap rates and the United States Treasury rate is nearly 200 basis points, compared with just 70 bps Ten Years earlier.

“There’s certainly plenty of cushion in the spreads, which is why we believe industrial rates can continue to rise, even in this rather frightening part of the cycle,” Circ said.

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