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Increased Supply Inhibiting Industrial Market In 2019

November 12, 2019
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IRVINE, Calif. and SILICON VALLEY, Calif., Nov. 12, 2019 /PRNewswire/ -- Ten-X Commercial, the nation’s leading transaction platform powering 90% of all online commercial real estate sales, today released its latest Industrial Market Outlook, including the top five ‘Buy’ and ‘Sell’ U.S. markets for industrial properties. The report found that, while the rise in e-retail and the legalization of marijuana have continued to fuel demand for warehouse space, there is still increased supply of – and softer demand for – industrial properties, causing the sector’s prognosis to slip.

The sector’s slowdown is largely due to weaker absorption rates, of which the trade wars with China and other countries is a contributing factor. Because developers have overshot the demand for industrial space, vacancies are expected to rise throughout the remainder of 2019 and into 2020. Despite softening fundamentals, industrial rent growth remains decent, in the mid-2% range, with rents at an all-time high, up 2.6% from Q2 2018.

Per RCA, industrial deal volume measured $19.3 billion in the second quarter of 2019, a considerable year-over-year decline. Industrial pricing continues to rise year-over-year, increasing 11.8% from Q2 2018. When compared to the other CRE sectors – retail, office, multifamily and hotel – industrial is the only sector with cap rates at their lowest levels, measuring 5.1% in Q2 2019.

According to the Ten-X Industrial Valuation Index, valuations are predicted to decrease 1.4% by the end of the year as cap rates are expected to slightly rise. Testing valuations with a down-cycle scenario, valuations would decline some 18% in the event of a recession, while cap rates would increase to the upper-6% range, as a result of widening cap rate spreads in response to the weaker fundamentals and investor demand. On the recovery side of the cycle, valuations would rebound, increasing approximately 23% by the end of 2022. This change would ultimately bring valuations back on par with their 2018 cyclical peak.

Additional data from the Ten-X Commercial Industrial Nowcast, which gauges real-time property pricing dynamics using market activity data from the Ten-X Commercial Platform, show that industrial pricing was up a modest 0.6% year-over-year in September 2019, but remained flat on a monthly basis.

Insights from the Ten-X Commercial Platform, which also includes data from beyond Q2 2019, demonstrated a peak in vault visitors in the first quarter of 2019. This number has since declined, largely due to a change in the type of properties being brought to auction. In Q3 2019, properties skewed toward redevelopments and value-add assets, attracting less industrial investor interest.

“The number of industrial properties coming to the Ten-X Commercial Platform is expected to rise in the last few months of 2019, which is reflective of typical year-end behavior,” said Ten-X Chief Economist Peter Muoio. “Additionally, the trifecta of e-retail, cannabis, and data centers have added additional demand drivers for industrial space that will have a long-term, positive effect on the industrial market.”

Q2 2019 - 2022 US INDUSTRIAL PROJECTIONS

Top 5 Buy Markets

2022
Forecast

Rents ($ psf)

Change in

Rents, Present –
2022 (%)

2022
Forecast

Vacancies (%)

Change in

Vacancies,
Present –
2022 (bps)

Los Angeles, CA

8.40

+9.1%

4.4

-20 bps

Sacramento, CA

5.44

+6.7%

9.4

-30 bps

Phoenix, AZ

6.65

+4.6%

14.9

+90 bps

San Diego, CA

10.37

+6.5%

11.1

+140 bps

Palm Beach, FL

7.98

+6.0%

8.1

+80 bps






Top 5 Sell Markets

2022
Forecast

Rents ($ psf)

Change in

Rents, Present –
2022 (%)

2022
Forecast

Vacancies (%)

Change in

Vacancies,
Present –
2022 (bps)

San Antonio, TX

5.55

-1.9%

14.4

+280 bps

Dallas, TX

4.66

-2.9%

14

+180 bps

Pittsburgh, PA

4.90

-0.6%

11.4

+200 bps

Seattle, WA

8.33

+3.3%

12

+480 bps

Suburban Maryland

8.81

0.5%

10

+30 bps






US

5.98

3.6%

10.3

+60 bps

The Industrial Sector’s Top Five ‘Buy’ Markets:

Los Angeles, CA
Los Angeles is one of three California cities identified as a top industrial ‘Buy’ market. Due to current technology-driven trends and statewide cannabis legalization, California leads the way in industrial demand. Industrial rents in Los Angeles are expected to increase 9.1% to $8.40 per square foot by 2022, while vacancies are expected to decrease by 20 bps to 4.4%.

Sacramento, CA
The second city in California to be named a top ‘Buy’ market, Sacramento is predicted to see local rents rise to $5.44 per square foot by 2022, up 6.7%. Additionally, vacancy rates are forecasted to tighten to 9.4%.

Phoenix, AZ
Despite transaction volume flattening across Arizona, Phoenix is home to a healthy industrial market. Rents per square foot are expected to increase 4.6%, reaching $6.65 by 2022. However, vacancy rates are predicted to increase from their current level to 14.9% due to cyclical pressures.

San Diego, CA
A third California market to appear on Ten-X Commercial’s top ‘Buy’ market list, San Diego has a strong industrial outlook. Although vacancies will deteriorate some in the event of a recession, rents should be resilient, increasing by 6.5% to $10.37 per square foot by 2022.

Palm Beach, FL
Industrial buying activity is also ramping up in Florida. Palm Beach is expected to see a 6% increase in rents, reaching $7.98 psf by 2022. During this time period, vacancy rates are expected to increase due to cyclical pressures, but remain at a relatively healthy level of 8.1%.

The Industrial Sector’s Top Five ‘Sell’ Markets:

San Antonio, TX
With transaction volume declining across Texas, San Antonio is more vulnerable to a down cycle. Rents look to decrease by 1.9%, dropping to $5.55 by 2022, while vacancy rates are expected to increase by 280 bps to 14.4%.

Dallas, TX
An additional Texas market to be named a top ‘Sell’ market, Dallas is predicted to see vacancy rates rise to 14% by 2022 in the event of a recession. Additionally, rents are expected to decline 2.9%, to $4.66 per square foot.

Pittsburgh, PA
The industrial market in Pittsburgh is also predicted to struggle, with rents forecasted to decrease by 0.6% to $4.90 per square foot by 2022. Vacancy rates are expected to increase by 200 bps, reaching 11.4%.

Seattle, WA
With the West Coast particularly vulnerable to trade tensions with China, Seattle was identified as a top ‘Sell’ market. By 2022, vacancy rates could reach 12% – up from their current level of 7.2%.

Suburban Maryland
Deal volume has slowed across Maryland, and the state’s suburban areas are projected to continue to underwhelm. Rents look to decrease 0.5% by 2022 and vacancy rates are projected to land at 10%, above their current 9.7%.

About Ten-X Commercial
Ten-X Commercial is the leading end-to-end transaction platform for commercial real estate that powers more than 90% of all online CRE sales. Our platform empowers brokers, sellers and buyers with data-driven technology and comprehensive transaction tools to expand market visibility and decrease time to close. Ten-X Commercial is headquartered in Irvine and Silicon Valley, Calif., with offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P., CapitalG (formerly Google Capital) and Stone Point Capital.

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SOURCE Ten-X Commercial