Is Class-A Industrial Worth the High Price Tag?

This year, industrial investment demand has reached new heights in response to strong ecommerce activity during the pandemic. Class-A industrial properties now come with a hefty price tag and a reduced cap rate—but investors should be cautious. While e-commerce giants like Amazon may warrant the high cost, not all class-A industrial is equipped to accommodate these users.

“Industrial has changed over the last 15 years, but it hasn’t fully changed yet,” Jonathan Needell, president and chief investment officer of KIMC, tells GlobeSt.com. “You have 20% of sales in the market today that are trading for ridiculous cap rates that are leased to household names, like Amazon, but they are fundamentally a different product than even class-A industrial for the rest of the market.”

In the last decade, industrial product has changed dramatically. Only a few years ago, 32-foot clear heights, dock-high levers, expansive truck courts and one per 1,000 parking had become the standard for ecommerce companies. “At that time, everyone was looking around wondering how industrial could get any more sophisticated? Then the ecommerce user came a long,” says Needell. Today, industrial buildings come with 40-foot clear heights, three per 1,000 parking ratios and even mezzanine office space.

“That is a minority of the product, but it is selling at a really aggressive cap rate. I think a lot of brokers are promoting industrial as being an unbelievable investment asset because of the ecommerce boom,” says Needell. “The reality is that the majority of class-A product is not the stuff that ecommerce companies would use. That is causing a real bifurcation in the market for sale and cap rates.”

Needell is also concerned that retail bankruptcies could destabilize the industrial market, particularly for more traditional class-A ecommerce companies. “People also underappreciate that retailers also use industrial space,” he says. “When they go bankrupt, and a lot of them are, there is some competition between retail industrial space at certain cap rates.”

While KIMC is taking a cautious approach, it is still pursuing investment opportunities. The firm is focused on last-mile distribution in infill markets. “There is a minority of the product that deserves to be a low cap rate asset. You can’t drag regular, good class-A industrial along with that cap-rate wise,” says Needell. “There are definitely more dollars chasing fewer deals that qualify for that low cap rate.”