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Industrial Real Estate Sector Hits New Heights
With more and more investors focusing on this golden asset class, where does industrial stand in the cycle?
The Industrial Sector Continues Record-Setting Growth
Image by Petrebels from Unsplash.
Industrial commercial real estate assets are in extremely high demand in most parts of the country, both for tenants and investors. As a result, pricing has soared.
Consider Newmark’s first-quarter national report on the sector, which pegged national asking rent growth at 12.8% year-over-year, far outpacing inflation. Rents at the end of March averaged $9.26 per square foot for triple-net leases and are expected to strike into the double digits in the next year.
Investment volume has also jumped up, with transactions topping $165 billion in the year ending in March. A May report from CommercialEdge projects that this year’s volume is unlikely to surpass last year’s, but pricing per square foot has risen significantly. Looking at sales year-to-date through April, pricing hit $135 per square foot, or a 20% increase compared to 2021. And, given the scarcity of modern industrial assets — despite more than half a billion square feet under construction — pricing is assured to rise even higher.
Coastal Industrial Market Boom
Nowhere are the industrial sector’s current dynamics so apparent as they are in coastal markets, particularly those near major ports.
Take Los Angeles, for example. The market, constrained by a dearth of available land for new development, has seen vacancy plummet in recent quarters, ending at 0.49% at the end of the first quarter. The nearby Inland Empire offers a case study of how spillover industrial markets can shine: The market’s vacancy is even lower than Los Angeles’, and rents — while still a bit cheaper — are quickly catching up. As a result, investors have flocked to the region. Development in the outer reaches of the market is in full swing, but it’s nowhere near the level needed to meet current, let alone future, demand.
Northern New Jersey offers a similar example. With port traffic surging in the region, the market is ideally positioned to serve much of the northeastern U.S. Although land is becoming scarce, demand for modern distribution space is not: Vacancy fell to 1.0% in the first quarter, according to a JLL report. At the same time, the analysis indicates nearly 26 million square feet in demand, in stark contrast to the 16.3 million square feet of available properties under construction. As a result, rents — already up 38.4% compared to the first quarter of 2021 — will only go higher.
As an investor, do rising prices provide any opportunities to acquire an in-demand Class A property? While prices are indeed as high as they’ve ever been, solid fundamentals boosted by the staggering sustained rise of e-commerce paint a very bright picture for the sector in the long run.
Financing is the key to landing new opportunities, of course, and more and more lenders are focusing on the industrial sector. Lending terms are improving due to the extremely positive outlook for the asset class. Not sure what kind of financing you’ll need? Check out our newly launched IndustrialProperty.Loan to find the answers you’re looking for.
What are the key trends driving the industrial real estate sector?
The industrial real estate sector has been driven by the rise of e-commerce and the ever-greater role logistics providers play in our lives. This has led to an unprecedented demand for modern industrial space. Additionally, the manufacturing sector is seeing a resurgence due to the increase in demand for electric vehicles. According to a second-quarter report from JLL, there was 77.2 million square feet of manufacturing space underway nationwide, with 58% directly related to electric vehicle parts or assembly operations.
What are the benefits of investing in industrial real estate?
Investing in industrial real estate can provide a number of benefits, including potential tax advantages, increased cash flow, and potential appreciation. Industrial real estate can provide investors with depreciation deductions, which can reduce their taxable income. Additionally, industrial real estate can provide investors with a steady stream of rental income, which can be used to pay down debt or reinvest in other properties. Finally, industrial real estate can appreciate in value over time, providing investors with a potential return on their investment.
What are the challenges of investing in industrial real estate?
The main challenge of investing in industrial real estate is the high cost of entry. Prices are at an all-time high, and it can be difficult to find an in-demand Class A property that is affordable. Additionally, there are other exterior and interior considerations to take into account, such as loading equipment, clear heights, and column spacing. Repositioning a dated industrial facility can be a great way to earn a strong return on your investment, but it requires significant capital to bring it up to speed.
If you're looking for financing options, check out our newly launched IndustrialProperty.Loan to find the answers you’re looking for. We offer a variety of loan products, including permanent financing and fix-and-flip loans.
What are the best strategies for investing in industrial real estate?
The best strategies for investing in industrial real estate depend on your individual goals and objectives. It is important to consider the fundamentals of the market, such as the local economy, population growth, and job market. Additionally, you should research the different types of industrial real estate available, such as warehouses, manufacturing facilities, and distribution centers. You should also consider the financing options available, such as build-to-suit construction loans, acquisition loans, and other types of commercial real estate loans. Finally, you should consider the five key considerations for choosing an investment property, such as location, asset class, and expected returns.
For more information on financing industrial real estate, please visit https://www.commercialrealestate.loans/blog/how-to-finance-a-build-to-suit-industrial-development. For more information on choosing an investment property, please visit https://www.commercialrealestate.loans/blog/5-considerations-for-choosing-an-investment-property.
What are the most important factors to consider when investing in industrial real estate?
The most important factors to consider when investing in industrial real estate are the location of the asset, proximity and ease of access to major transportation corridors, and the interior features of the building. Location is paramount, as it is for most commercial real estate investments, and industrial properties have very different demands of their location than other property types. Proximity and ease of access to major transportation corridors is essential, as is being near a major seaport, intermodal terminal, or freight railroad line. The interior features of the building are also important, such as column spacing, clear heights, electrical supply, and floor thickness.