Industrials: Short-Term Holders, Sell! Long-Term Holders, Borrow!

Jay Olshonsky, president of NAI Global (Steve Lubetkin Photo/StateBroadcastNews.com. Used by permission)

JERSEY CITY, NJ—Industrial property investors with a short-term holding period for the asset should start selling now, and long-term investors should begin to borrow against their properties to position themselves for additional acquisitions, says Jay B. Olshonsky, FRICS, SIOR, president of NAI Global.

Olshonsky, the kickoff presenter Thursday at the NAIOP I.CON: Trends and Forecasts conference in Jersey City, NJ, says his firm’s chief economist, Dr. Peter Linneman, argues that investors should consider their holding period when deciding about these assets.

“If you need to sell because your owners have decided to sell in the next two or three years, sell now,” he says. “If you’re going to hold for five years, sell now, because you don’t want to get into a dip. But if you’re holding for ten years or forever, borrow as much as you can right now, put it away and buy as much as you can right now. I’m talking about all real estate, but in particular, industrial.”

From the user perspective, the main driver of industrial properties is e-commerce, Olshonsky says. With vacancy rates around seven percent, demand for space will remain high.

“When you have a seven percent vacancy rate on a 13 billion square foot stock, that’s a very healthy market,” he says. “At the same time we’re not seeing enormous amounts of development or oversupply, and that’s the reason why all real estate markets are going to perform better over the next five to seven years.”

The industrial property world has changed dramatically since 2009, and has been “fairly straight uphill” since about 2010, Olshonsky says.

In January 2016, according to an NAI Global economic report distributed at the session, real US industrial construction spending stood at $99.6 billion, significantly above both the historical (since 1993) low of $38.1 billion (2011) and the long-term average of $62.8 billion.

The one factor that could stop the market’s growth is labor. “It’s essentially a very labor-intensive type of development,” he says.  “They’re not driving 53-footers into the city that often.”

Logistics companies are still interested in being fairly close to major cities like New York, which only has about a three-day supply of food on-hand at any time, he says.

According to Olshonsky, NAI Global’s Linneman sees industrial vacancy rates dropping to three percent or lower by 2019 in Austin, Charlotte, Cleveland, Denver, Detroit, Ft. Lauderdale, Los Angeles, the Inland Empire, Orlando, Portland, San Diego, San Francisco, Seattle, and Tampa Bay.

Construction is highest in Dallas, the Inland Empire, Philadelphia, corresponding somewhat with where e-commerce and port activity is increasing, he says.

Nevertheless, rents are not increasing to take into account the need for more development, he argues. Average asking rents are in the $6 per square foot range, which is not enough to support new development, and still quite far below the $9 peak reached around 2001.

Even though there is likely to be a shakeout among e-commerce companies, investors are still placing very specific bets in the sector.

“At some level, do we need five competitors to Amazon right now? Do we need ten places I can get groceries delivered from?” he asked. “One risk you have is that not all the companies that do e-commerce, that affect industrial, are going to make it. At the same time, a large institutional owner told us, ‘I want to invest in industrial buildings occupied by e-commerce food delivery tenants,’ and that’s all they want to invest in. They say, ‘We want that kind of tenant because we believe that trend will continue, and it’s a specialized warehouse because it needs to be refrigerated, so even if that tenant goes out, we believe another one will come back in.’”

Olshonsky sees industrial rent growth in Oakland: “Keep in mind that if San Francisco goes over the top in tech, in people, like it did before, you will not have the same demand, but right now the demand is going straight uphill in the Oakland Bay area, that’s really the only place you have the industrial stock,” he says.

New Jersey benefits from the rent growth, “mainly because you’re getting competition on infill sites from the residential and the industrial developers,” he says. Development sites that were traditionally industrial are seeing competition for residential development because of the demand from renters seeking more affordable alternatives to Manhattan and the other Boroughs.

Users remain willing to pay higher rents to save money on supply chain, labor, and transportation costs, Olshonsky says, concluding broadly that “It’s a wonderful time to be in the industrial market right now, and there’s no reason to believe that will not continue for the near term.”