Middle Market Industrial Sales Jump in 2018

Middle market industrial transactions jumped this year. With only two months left in the year, industrial transactions have nearly topped 2017 volumes. Next year, however, industrial sales activity may wan, thanks to increasing pricing. Already, investors are showing hesitation and transactions are taking longer to close. Moon Lim and Richard Tovar have joined JLL in the firm’s Los Angeles Capital Markets team to focus on the Vernon industrial market.

“If you look at Vernon transaction’s 2017 there was a velocity of over 4% with approximately 44 transactions. Year to date 2018 the market has exceeded 40 transactions with 2 months remaining,” Tovar, a VP at JLL, tells GlobeSt.com. “To say the least the industrial market has been strong. Looking back, 2017 we found buyers willing to meet the demands of aggressive sellers. Class-A industrial space continued to climb reaching 20% increases in value over year prior. Now, moving towards the tail end of 2018 we have finally begun to see some push back from buyers on pricing. Transactions seem to be taking longer as buyers re-evaluate.”

There are an amalgam of factors contributing to the surge in sales volumes as well as pricing. Specifically, repurposing, e-commerce, marijuana legalization, and trade policy. “Many long-term holders want to capitalize on the current market and take their money and run,” adds Tovar. “In addition, trade policy has impacted textile companies who are a staple in Los Angeles and Vernon. As textile company’s face more uncertainty and profit margins shrink owner-users are looking to downsize or get of the business completely. A likely candidate to fill the void will be last mile distribution centers as e-commerce becomes more prevalent.”

Institutional capital is While the sales transactions have outpaced activity last year, velocity has slowed in the last two quarters. “According to Costar the average sales transaction time has increased from 4 to 6-and-a-half months,” adds Tovar. “Furthermore, the average price per square foot has declined. Ultimately, I think the market is still strong and have a positive outlook. It is our job as brokers to push the market and at the same time educate the client on market conditions.”

While sales velocity is slowing, interest rates haven’t been a factor, and Tovar doesn’t expect rising interest rates to impact sales transactions next year. “In the Private Client industrial market 90% of the deals are owner user,” he says. “A large portion of the buyers are either out of a 1031 exchange or transitioning from a tenant to owner. Many prospective buyers are qualifying through an SBA Loan program with 10% down. At the current prime rate of 5.25%, I do not anticipate much impact on industrial owner users looking to buy. In June 2006, the prime reached a high of 8.25% and at that time there was no shortage of buyers. Ultimately, I do not believe the interest rates will slow down buyers, I think it will be pricing.”