Industrial Investors Pivot Based on Supply Chain Shifts

Originally published by GlobeSt

Marcus & Millichap reported this week that redirected supply flows are affecting investment decisions in the industrial space.

Given rising direct-to-consumer delivery, nearshoring production would place added emphasis on border locations and intermodal hubs with sizable rail and road infrastructures.

San Diego, Detroit and San Antonio could emerge as locations for tenants and investors, needing warehouse and distribution assets in these cities.

“Domestic manufacturing space is also becoming increasingly popular among investors as some firms look to build new operations or reshore, often utilizing advanced production techniques,” according to the report.

Playing the ‘Long Game’ Could Help Investors

Scott Abrahamson, senior counsel, Cox, Castle & Nicholson, tells GlobeSt.com that the volume and speed of industrial transactions, particularly in Southern California, over the last few quarters “has been incredible. However, due to the dramatic and rapid change to interest rates, we are seeing investors reassess their current investment pipelines and strategies to make sure that the transactions are accretive and sound in this environment.”

Abrahamson said he anticipates that the pace of industrial transactions will pick back up once investors have an opportunity to determine how interest rates changes will impact pricing.

“Investors who are willing to play the long game will find a lot of opportunity in the industrial space and will continue to pursue strategic industrial assets, including development projects.”

Atlantic Ports More Attractive

Andrew Zola, Consultant at CoStar Group, tells GlobeSt.com, “As supply chain disruptions continue, investment decisions surrounding the industrial property type are bound to be affected.

“Atlantic port markets should garner more attraction as Los Angeles/Long Beach continues to be backlogged,” Zola said.

As of April, Atlantic ports have garnered 44% of twenty-foot-equivalent units (TEU) imports, according to the port data CoStar Advisory Services tracks, and has been increasing steadily since 2017.

“As more TEU imports go through the east coast, investor appetite should follow,” Zola said. “Industrial properties near infrastructure, particularly major seaports and airports with significant cargo throughput, have outperformed recently, and should be more attractive for tenants and owners to help decrease lead times.

“Properties within port submarkets, defined as those containing properties within 10 miles of the infrastructure, according to CoStar Advisory Services, have seen a roughly 37% sale price premium over properties not within port submarkets as of 22Q2.”

Additionally, Zola said that asking rent growth near seaport and airport infrastructure is averaging 15%, compared to 10% for properties not near infrastructure as of 22Q2, along with already having a 41% premium, showing that those facilities are highly desirable.

“Strong pricing and rent gains near infrastructure should continue to spark investment near infrastructure nodes, especially as supply chain disruptions continue and tenants continue to try and shorten lead times with their consumers,” he said.

Companies Expanding Domestic Storage Space

Doug Ressler from Yardi’s Commercial Edge, tells GlobeSt.com that global trends place the industrial sector in a favorable position.

“Multiple factors are driving record demand for industrial space,” Ressler said. “Retail spending is elevated both at store and online, fueling the need for more distribution and logistics resources. The inability to source both raw materials and finished goods from overseas on time has also pushed companies to expand their domestic storage capacities to set aside additional inventory when it does arrive.”

Logistical Square Footage in Demand

Jacob Ryan, senior associate, Northmarq, tells GlobeSt.com, “With retailers and manufacturers shifting a greater focus to producing more goods closer to home, we should continue to see an uptick in demand for logistical square footage in not only domestic ports of entry, but in major air hubs.

“We could also see an increase in demand for industrial assets in secondary and tertiary markets as retailers and manufacturers begin to expand outside of larger markets due to wage growth and labor supply needs. As a result, investor demand for assets in secondary markets that are located adjacent to major interstates or regional air hubs should continue to rise and become even more desirable investment vehicles in the future.”

Must Contend with Rising Interest Rates

Joe Mishurda, managing partner, North Palisade Partners, tells GlobeSt.com that the industrial market continues to outperform other commercial real estate asset classes entering the second half of the year.

“The rise in remote work and consumers’ shifting shopping habits sent e-commerce activity skyrocketing over the past two years,” Mishurda said. “This momentum has resulted in explosive growth across the industrial segment. We’re seeing unabated demand across the entire spectrum of industrial end users, from warehouses and e-commerce distributors to food production and manufacturers.”

That’s not to say the sector is without its challenges, he added.

“Much like the rest of the economy, industrial developers, owners and investors must contend with rising interest rates, labor issues and supply chain disruptions, as well as an unstable economic and political climate,” Mishurda said.

“Shifting consumer buying habits impacted the way retailers and manufacturers produce and deliver goods—namely, an accelerated speed-to-market approach fuels the need for more product, resulting in a constant cycle of demand and supply that has become the new norm for our world. Any disruption in the global supply chain will make demand for US industrial even greater, or at least as strong as the growth of the economy.”

Real Estate Investment as an Inflation Hedge

Rob Sistek, senior managing director, investments at BKM Capital Partners, tells GlobeSt.com that capital markets are bullish on the industrial sector because there’s both strong secular demand for the asset type and a shortage of supply in some of the industrial sub-sectors.

“Investments in industrial real estate have largely outperformed other asset classes due to strong fundamentals, which have benefited from e-commerce (particularly last-mile distribution), labor shortages, increased consumer expectations and, more recently, US onshoring of manufacturing.

“In fact, manufacturing demand is expected to rise this year as more companies onshore their operations to avoid supply chain disruptions.”

Sistek said that investors are expected to continue targeting real estate for attractive returns and stability relative to other asset classes, and increasingly, as an inflation hedge, which is expected to drive increased investment volumes in 2022.

“Industrial real estate is proving to meet and exceed the return requirement investors seek, compared to other asset classes or investment options,” he said. “Investors are paying close attention to rapidly rising rents and increasing NOI, which in turn boosts IRRs and equity multiples.”