The economic shores are starting to get frothy, with incoming waves like Chinese tariffs and a downturn market threatening to crash on the beach.
Despite this, the 2020 outlook for U.S. industrial real estate remains positive as low vacancy rates and rising rents offer a calming breeze.
That was the message from the speakers at Avison Young’s U.S. Industrial Summit, a two-day event recently held in Chicago. Approximately 100 Avison Young real estate professionals, as well as leaders from global supply chain, development and investment firms, heard how the industrial sector should perform well even in the face of economic instability.
There are headwinds, such as overbuilding and rental rate stagnation, that may limit investment growth in some markets. However, the overall outlook for the industrial sector remains positive, according to industrial real estate executives.
“Industrial remains one of the top investment classes, buoyed by corporate supply chain expansion and the ability to generate stable returns without the volatility seen in other market sectors,” said Erik Foster, Avison Young principal and leader of the firm’s U.S. industrial capital markets group. “As we head toward 2020, we’re seeing investors focus on reducing risk and returning to core investments that can provide steady income growth.”
Investors, landlords and developers at the industrial summit noted a need for shifting strategies to minimize risk at this stage in the economic cycle. They highlighted several trends heading into next year.
For one, the top markets are land-constrained and port-centric. Industrial markets expected to continue to perform well into 2020 are California’s Inland Empire, Dallas, New Jersey/New York City, Seattle, Chicago, Miami and Atlanta, among others.
“The Seattle, Los Angeles, Miami, Oakland and New Jersey markets, for example, have seen record growth and offer stability for the long-term, even if an economic downturn occurs,” said Jim Clewlow, chief investment officer of CenterPoint Properties, a leading commercial real estate firm specializing in acquiring land and facilities near ports and intermodal facilities.
The Chicago-based company typically acquires between $500 million and $1 billion of industrial space per year and develops about the same amount, all in nine port-centric markets.
“We are looking for rental growth that doesn’t have a lot of volatility,” said Clewlow. “Markets with low vacancy rates, strong rental rates and proximity to ports should continue to fare well into 2020.”
In Chicago, for example, industrial activity is strong due to the central Midwest location, availability of labor and the presence of multiple transportation and intermodal options for industrial users, such as O’Hare International Airport, a legacy rail infrastructure and scores of highways. CenterPoint owns the largest master-planned inland port in North America, CenterPoint Intermodal Center in Joliet and Elwood, Illinois, in Chicago’s I-80 corridor.
The O’Hare area saw a massive jump in O’Hare construction during the first quarter of 2019. The submarket continued to see strong demand in the second quarter from developers and a shortage of land, which is pushing up land prices to around $25 per square foot, according to Avison Young research.
Most U.S. industrial markets tracked by Avison Young are reporting single digit vacancy rates heading into Q3 2019, despite an influx of new product. Strong demand and tight supply are putting upward pressure on rents in many markets and driving investment activity.
“In fact, rent growth is a key motivator of investment decisions,” said Jojo Yap, chief investment officer and co-founder of First Industrial Realty Trust, a fully integrated owner, operator and developer of industrial real estate.
The Chicago-based firm has 63 million square feet of industrial assets in its portfolio and another 5 million square feet under development.
“A driving force for making profitable investments and avoiding capital and value destruction is increasing net operating income,” said Yap. “We are very focused on investing in submarkets where we can achieve above-average rent growth. Last quarter we boasted the highest rent growth of all national industrial REITs at 13.4 percent cash on cash on new and renewal leasing. That was the highest in our 25-year history.”
Looking ahead, most investors will look to minimize risk by moving back to core assets. As stable as the overall industrial sector is currently, assets in major industrial markets will be the focus, as investors look to hedge against any market slowdown.