The Rise of Industrial

Over the past five years, the industrial asset class has seen an impressive ascent. Considering the e-commerce boom and the market’s rising demand for “big-box” warehouse spaces, it’s no wonder the sector continues to thrive.

Below, we explore the market’s performance at the national level, diving deep into sales prices, transaction activity and other notable trends.

Key Takeaways:

Sales Prices Soar:

Average sales prices of industrial properties continue to increase. Currently, the national average sales price sits around $1.64M — 13.1% higher than average prices in 2014.

Primary Markets Could be a Culprit:

Deal flow in tertiary markets trump those in secondary and primary areas, but it’s possible pricey transactions in main metros are contributing to a general uptick in industrial price tags.

Sub-Markets Stand Out:

Specific sub-markets like storage and industrial parks are attracting attention. In fact, Reonomy data indicates that prices in these sectors have grown over the past 5 years despite supply remaining stable.

 

As Demand Grows, Prices Do Too

There’s really no ignoring the level of demand that’s driving industrial’s bullish market. According to CBRE, e-commerce accounts for almost 9% of the nation’s total retail sales. The sector has also grown 3x faster than traditional brick-and-mortar sales since 2010. As retail becomes more digitized and technology continues to transform supply-chain, competition for warehouses and big-box buildings is growing, driving availability down but prices up.

According to Reonomy data, the national average sales price of industrial properties has steadily climbed over the past 5 years. With the exception of a slight dip between 2015 and 2016, sales prices have grown at a healthy rate. Currently, the national average sales price of industrial properties (which includes everything from public storage to heavy industrial plants) sits at $1.64M —13.1% higher than the average sale prices in 2014.

Our data also shows the percent change of national average sales prices year-over-year have remained relatively stable, barring years 2015-2016. Since 2017, rates have fluctuated slightly, hovering between 2-4% in price change year-over-year.

To reiterate, the level of demand is there–macroeconomic contributors are shifting the tides of the industrial world we once knew, causing commercial real estate professionals to pay more competitive prices than in the past. Whether or not this “price bubble” will pop in 2020 is still up for grabs, but given the sector’s strong performance up until this point, a burst is unlikely.

Capital Flows in Primary Markets

 

Nationwide, transaction activity in the industrial market remains relatively stable. Since 2014, roughly 31,000 sales have transacted each year, and 2019 is pacing similarly.

The proportion of investment in primary, secondary and tertiary markets also remained constant from 2014 to 2019, with the majority of annual transactions occurring in tertiary markets. However, Reonomy data shows the average sales price in larger, gateway markets, like New York, Chicago and Los Angeles, are significantly greater.

Could this be contributing to inflated sales prices? It’s possible. So far, average industrial sales prices in primary markets land just above $5.5M–a number that has swelled since 2014. Contrarily, current average prices in tertiary areas land at around $1.75M, and have actually declined since 2017. Simply put, while there’s more smaller investments happening in tertiary markets, the larger transactions are happening where supply is lower and competition is fierce, potentially driving up prices across the board.

Certain Sub-Markets Shine

By and large, the industrial sector is strong. But it’s really certain sub-markets that stand out.

In examining average sales prices by specific asset type, heavy industrial properties topped out at the most expensive, with average sales prices oscillating between $3-$4M over the past five years. This is unsurprising; heavy industrial sectors, like oil, iron and coal factories and refineries are generally more capital-intensive, requiring larger, more sophisticated buildings equipped with the proper resources.

However, Reonomy data indicates that smaller, less obvious sub-markets, like industrial plants and storage containers, are the markets to watch. Both asset classes have seen an increase in sale prices, but maintain a stable number sales across all 5 years.

The growth in prices of industrial plants could be attributed to the manufacturing sector’s performance. Manufacturing is still an important component to the GDP, and according to the Bureau of Economic Analysis, drove 11.8% of the U.S. economic output throughout 2018. As for storage, lifestyle changes and homeownership decline could be attractive to investors and developers. Simply put, more renters need more places to put their stuff—many will pay for the extra space.

It’s possible a burgeoning demand for such assets could be turning the heads of investors and developers towards new, non-traditional assets. The need for warehouses and large, vacant spaces certainly isn’t going away anytime soon. But, as market dynamics ebb and flow, investors and developers might be exploring new, non-traditional options.

Looking Forward

The future looks bright for industrial.

It’s obvious the demand is there—with more and more players interested in the vertical, prices are reacting accordingly. Especially in primary markets where supply is already limited, the competition for high-yielding assets is particularly fierce, pushing prices even higher. Such saturation also seems to be sparking interest in new, underestimated sub-markets where risk is higher, but returns are greater.

Overall, such healthy, dynamic activity has the sector on our radar—stay tuned for more updates as we continue to track the market’s performance now, and in the coming years.

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