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Calkain Research has done a quick overview of the issues facing the industrial market and industrial net leases specifically. Our analysis focuses on pertinent facts, conditions and trends to glean where we are today and will be tomorrow.
Market Statistics:
•CoStar Group reported 13 million SF of positive net absorption in 2Q 2010. This is the first positive reading since mid-2008.
•The national vacancy rate decreased from 10.1% to 10% according to Costar, the first drop in over two years. Availability also slightly decreased from 14.8% to 14.7%.
•Real Capital Analytics reports that single tenant industrial cap rates had a weighted average of 8.5% in 1Q 2010. 85 basis points higher than the same period last year.
Market Conditions:
•Occupancies have leveled off.
•Many current customers, due to their own economic uncertainty, choose to stay in their current space and negotiate more favorable terms.
•Cost to move is very high.
•Due to negative demand, development is down.
Current Trends:
•Companies have shifted to leasing space rather than owning, preferring to invest their capital in their core products/ product development (Coca Cola is prominent in this).
•Current Buildings that have been around for decades are becoming functionally obsolescent to meet modern design specifications.
•Because rental rates are so low, demand will have to drive rents up, narrowing the gap between today’s cap rates so that developers can once again make a profit. Currently, developers are sitting on the sidelines until that happens.
Positive Indicators:
•When demand does turn around, industrial has a short construction cycle and can therefore respond quickly.
•Building obsolesces alone will account for a huge increase in demand over and above an economic recovery that would result in increase supply and demand.
•Most industrial properties have NNN leases which means most cost increases are passed onto tenants.
Expert Opinions:
Gordon Whiting, founder and Senior Portfolio Manager of Angelo, Gordon's net lease real estate strategy:
The strength of the industrial market today is still market specific and varies depending on the location and type of industrial asset. In general the bid and the ask spread has compressed and sellers have much more realistic valuations. In the single tenant triple net lease market, particularly in the less than investment grade area, where we specialize, initial cap rates are still double digit with annual rental increases. Those increases are usually tied to the increase in CPI and most times have a minimum rental increase. I believe that now is a good time to buy these assets and it is also a good time for sellers to sell. Mortgage financing has loosened up and that is a helpful market dynamic.
(To search across all ALM blogs, go to www.Lexis.com.)
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Comments+ Add your comment
Financing for net leased industrial properties has loosened up but there is a marked bifurcation in the marketplace. Well located properties (top 40-50 MSA's)subject to long term leases (15 years+) with investment grade tenants are readily financable with banks, insurance companies, pension funds and CMBS lenders. 10 year rates with 25-30 year amortizations and 60-70% LTV's are currently priced in the 5's. However, without at least two or the three key lending criteria in place (strong credit tenant, long term lease, good location), financing sources are much more limited and terms are not as attractive.
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