Stan Johnson’s Jimmy Ullrich On the Current Industrial Market

GlobeSt.com caught up with Jimmy Ullrich, director in Stan Johnson Company’s New York City office to discuss the industrial asset class. Read on to get his take on cap rates, family office appetite, where the growth is and his advice for investors new to the market. 

What are a few of the newer trends impacting today’s industrial sector?

Industrial has been on a tear for the last five years or so. What began as a somewhat boring asset class for life insurance companies is now the darling of Wall Street, private equity, “mainstreet” and everyone else! The amount of capital chasing the asset class is immense, and it’s applying downward pressure on yields. Furthermore, the asset class is buoyed by incredibly strong tailwinds from the once gradual, but now tectonic shift to e-commerce. Much of this is old news, but the new trends include an influx of New York City family offices chasing industrial product, particularly in the Southeast region. They are diversifying out of their New York City multifamily portfolios, which have been beleaguered by 2019 rent regulations and 2020’s pandemic. Another new trend is institutional capital’s willingness to buy smaller deals – in the $5.0 to $20.0 million range – in smaller markets.

What impact are these trends having on cap rates?

Institutional activity, like I mentioned before, is putting downward pressure on yields in traditionally high-yielding assets. Yesterday’s 7.0 percent cap rate is today’s 6.0 percent cap rate. But it’s happening so quickly that I don’t think we’re really seeing it reflected in the comps yet. But I expect we will see the cap rate compression when Q1 2021 numbers come out. The industrial market ended 2020 on a very high note, and we expect deal volume to stay very strong. With the assumption of increased deal volume, continued low interest rates, and an abundance of capital chasing scarce deals, I wouldn’t be surprised to see another 50 basis points of cap rate compression – perhaps not across the entire sector, but certainly for the highest quality assets including Class A distribution facilities. Another area to watch is the second-generation subset in secondary markets. These include smaller deals, Class B or C construction, non-credit tenants and/or short-term leases. This used to be a place to find yield – as high as an 8.0-cap. But believe it or not, institutions are starting to enter this space, and that’s impacting cap rates. In 2021, I think we’ll see 6.75 percent cap rates on assets that would have been trading 100 basis points higher in the past.

Which areas of the country are seeing the most growth, and why?

Industrial space demand and capital demand are following the population. For years, people have been moving to growth markets in the Southeast, Texas and the West, among others. Markets such as Tampa, Orlando, Jacksonville, Greenville/Spartanburg, Charlotte, Raleigh-Durham, Dallas, Austin, Denver and Salt Lake City have been booming. That was pre-pandemic though. Before COVID-19 hit, towns like these were offering great jobs and a lower cost of living than the larger metros. Now, the pandemic has enabled remote work on a much greater scale than in the past, so the job dynamic doesn’t necessarily need to be in play. We’re now beginning to see smaller towns like Missoula, Montana – with a population of only 120,000 – or resort towns like Park City, Utah start to see an influx of population growth. These markets will need more industrial space as populations start to rise.

What advice would you give to real estate investors who might be new to the industrial market?

I have this conversation every day. Take, for example, a New York City-based family office. They’re looking at deals we have in the market and really targeting the Southeast. But they lament that they haven’t won a deal yet. Step one – go South! Get on a plane and go to Jacksonville or whatever market you’re targeting. Meet the local brokers in person and let them know you’re serious about buying industrial. They get a lot of calls from New Yorkers but not a lot of visits. Step two – pick your spots. Refine your criteria so you and the brokers you’re working with know it. Candidly, in a frothy market, unknown buyers may need to pay a 25-basis-point premium to win a deal compared to known participants. Step three – manage your real estate risk. If you’re stretching to win a deal, make sure the rent is replaceable. You may pay up in terms of today’s cap rate, but if you’re in it for the long-haul, you’ll get paid later when the rents reset. And finally, step four – align yourself with a qualified, knowledgeable representative. I live and work with my team in New York City, but I spent the first decade of my career in Florida. There’s a reason the lion’s share of our business is in the Southeast – it’s a market we know and spend a lot of time in. So, we like to think of ourselves as tour guides or concierges for the New York real estate investors who are heading down to the booming Florida markets for the first time. It’s rewarding to see investors be successful in today’s market as we educate them on this really dynamic asset class.