Industrial Cap Rates Headed Even Lower

LOS ANGELES—"Cap rates will still go down. We'll see cap rates in the threes," said Mark Detmer, managing director and head of industrial capital markets in the western region at JLL, at the recent RealShare Industrial West conference. Last year, the industrial market had its best year in history, with a total of $56 billion in industrial investment. According to Detmer, while there may be some slow down this year, cap rates will compress even further.

Detmer spoke on the Port Activity, Logistics and Industrial Real Estate panel, along with Mark Hirzel, district manager, A.N. Deringer; Don Snyder, director of business development at the Port of Long Beach; and Kim Snyder, president of the Southwest region at Prologis; as well as panel moderator Ian Britton, managing director at Voit Real Estate Services. The other panelists shared Detmer's market perspective. "It is a safe asset class," said Kim Snyder. "Logistics is becoming part of the local economy in every economy."

A lot of the big business was done in the Inland Empire. According to Kim Snyder, 9 one-million-square-foot buildings went up in the Inland Empire last year, and all of that square footage has been absorbed, and he is sure the same thing will happen this year. In markets like the South Bay, which also has an incredibly low industrial vacancy, he said that they are trying to build multi-story industrial to accommodate the demand, but they have seen some pushback from the community.

As a result, tenants are moving out further because of lack of availability, and sometimes are looking for more flexible rents to do so. "There is not a lot of space, and it is forcing tenants to move east to markets they wouldn't normally consider," said Snyder. "Tenants are looking for some flexibility on terms and the ability to stage." For landlords with well-located properties, this is great news. Tenants are will to pay a premium to hang onto their locations. Some of the panelists said that rents on renewals were up 10% over the expected increase, in some cases.

The discussion ended with a question about the challenges for the year ahead. For the speakers on the logistics side, Don Snyder and Hirzel, coming up with smoother supply chain options and the limited options for cargo containers topped the list, while Kim Snyder and Detmer noted the regulatory environment as their biggest concern.