Warehouses are getting smarter, and distribution channels are getting more efficient. As consumers demand faster delivery of goods, the industrial sector will play a huge role in making that happen and technology will be the driver. That is according to Jimmy Ullrich, director of Stan Johnson Co., who recently chatted with GlobeSt.com on demand for industrial product and what he future looks like for the sector.
GlobeSt.com: What’s driving demand for industrial product in today’s market?
Jimmy Ullrich: Industrial is really the belle of the ball these days, and demand is coming from three directions. First, the reconfiguration of retail’s supply chain is driving demand for both warehouse and distribution space. Secondly, institutional capital has fallen in love with the asset class – they’re coming into the space in droves, driving down yields. I never thought I’d hear “Greenville-Spartanburg” as a buzz word on the streets of New York City, but quality product in markets of all sizes can be really attractive in today’s market. Lastly, my favorite driver of demand is coming from private buyers. 1031 exchange buyers who have spent decades buying low cap rate retail properties are growing weary of negative headlines. The doom and gloom – whether real or perceived – surrounding portions of the retail sector is causing some private buyers to migrate to industrial, which can offer better yields.
GlobeSt.com: Is demand the same across all markets and geographies?
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Ullrich: Not exactly. The Southeast is in favor right now due to high population growth, job growth, and manufacturer relocations. Markets like Charlotte, Raleigh-Durham, and the aforementioned Greenville-Spartanburg all continue to grow and attract both private and institutional capital. And Florida has always been great because of its zero percent personal income tax. The Pacific Northwest is also very popular with investors, particularly Washington with no state income tax. Yields here are very tight. And while the Midwest may not present the population growth story, this region can offer higher yields for investors too.
GlobeSt.com: What concerns do buyers have about changing market conditions, and what advice are you giving them?
Ullrich: There are two main categories of concern I’m hearing from clients today – challenges related to supply quality and interest rate movement. First, it’s tough to find good deals in a market that is saturated with average supply. There are too many buyers chasing too few high-quality deals. And when a quality deal hits the market, savvy investors will snap it up immediately. Some deals are even trading off-market in today’s environment. We saw similar trends back in 2005, although leverage levels are lower today, but regarding price, there is downward pressure caused by the abundance of capital, and pricing can easily get distorted. There remains a disconnect in buyer-seller expectation, and until that gap gets smaller, it’s tough for a prudent investor to wade through these waters. If you dig deep into the inventory though, there are certainly great deals to be made. As far as interest rates go, I thought we would have seen increased interest rates and corresponding increased cap rates in first quarter. Instead, interest rates pulled back and provided some late life to this real estate cycle. I’ve therefore been advising buyers to match their debt and lease maturities to defend against rising interest rates that will come eventually.
GlobeSt.com: Which industry trends do you think will have the biggest impact on industrial investment sales in the next 12-24 months?
Ullrich: If interest rates remain low, and rent and occupancy fundamentals remain strong, then we should see flat or increased sales volumes with stable cap rates. If either changes, we may be in for a correction. Another trend to follow is technology. Tech is changing the way we do business, and I am always looking for new ways to leverage tools that will help me serve my clients better. But the same trend is impacting the industrial sector at the property level too. Warehouses are getting smarter, and distribution channels are getting more efficient. As consumers demand faster delivery of goods, the industrial sector will play a huge role in making that happen and technology will be the driver.