Mediocre Gains Forecast as Industrial Vacancies Remain Stagnant

HOUSTON—The long-term industrial forecast reveals the sector continues to enjoy healthy expansion, thanks to the continued rise of distribution centers tied to the growth of e-commerce and the increasing use of warehouses as cloud computing facilities, according to Ten-X. The firm recently released its latest US Industrial Market Outlook, including the top five buy and sell markets for industrial real estate assets.

Ten-X Research's data suggests that Nashville, Los Angeles, Memphis, Atlanta and San Bernardino-Riverside, CA are markets in which investors should consider buying industrial assets. While overall economic conditions in these areas differ, each is in a unique position to capitalize on the mounting demand in the sector, citing strong absorption rates that promise to outpace supply during the next two years.

Other markets that rely heavily on energy industries are struggling amid the lasting slump in oil prices, which have contributed to an economic malaise affecting nearly all real estate sectors. Four Texas cities–Houston, Dallas, Fort Worth and San Antonio–are among the metro areas where industrial investors might consider selling properties, according to Ten-X. Suburban Maryland, a region in which the economy has proven sluggish due mostly to low population growth and a floundering professional and business services industry, also made the sell list.

“Houston industrial vacancies reached a cyclical trough near 8% in 2013 with robust rent growth in excess of 4% annually as a strong local economy fueled by high oil prices drove absorption,” Chris Muoio, senior quantitative strategist, Ten X tells GlobeSt.com. “During this time, development activity spiked, leading to a heavy supply pipeline that continues to come to the market. This caused vacancies to plateau near 8% for a while but as oil prices have remained low, and the local economy has cooled, absorption has waned, causing vacancies to rise modestly and rent growth to cool. We expect a limited rise in vacancies to the mid-8% range through 2018  due to this supply and demand imbalance before spiking to levels seen during the last recession in 2020 amid our cyclical downturn model. Rent growth has cooled to half of its peak growth pace, and will continue to see mediocre gains in the coming years as vacancies remain stagnant, before contracting as vacancies spike in our cyclical stress test.”

Overall deal volume for industrial assets fell to $12.5 billion during the second quarter according to Real Capital Analytics, a 26% decline from the same period in 2015. But vacancies have fallen into the mid-8% range, and rents have seen an uptick of about 2% year-over-year.

“The industrial sector is benefiting from the same shifts that are afflicting its retail counterpart. As more and more people choose to stay home to do their shopping, companies need more space to house and distribute the products they sell online,” said Ten-X chief economist Peter Muoio. “While other economic factors are hurting energy-dependent and port-exposed markets, this change in consumer behavior appears built to last, and puts industrial owners in a favorable position for the years to come.”

A majority of indicators show the sector should continue to blossom, as Ten-X Research predicts rents should increase by approximately 3% during the next two years. Vacancies, meanwhile, are likely to fall as low as the mid-7% range in 2018, which would be the lowest since 1990.

Investors should remain cautious, however, as the sector will remain vulnerable to a cyclical downturn on the horizon. Research shows vacancies are poised to rise to around 9% by 2020, while rents are projected to see a decline of about 1% per year beginning in 2019, says Ten-X.

HOUSTON—The long-term industrial forecast reveals the sector continues to enjoy healthy expansion, thanks to the continued rise of distribution centers tied to the growth of e-commerce and the increasing use of warehouses as cloud computing facilities, according to Ten-X. The firm recently released its latest US Industrial Market Outlook, including the top five buy and sell markets for industrial real estate assets.

Ten-X Research's data suggests that Nashville, Los Angeles, Memphis, Atlanta and San Bernardino-Riverside, CA are markets in which investors should consider buying industrial assets. While overall economic conditions in these areas differ, each is in a unique position to capitalize on the mounting demand in the sector, citing strong absorption rates that promise to outpace supply during the next two years.

Other markets that rely heavily on energy industries are struggling amid the lasting slump in oil prices, which have contributed to an economic malaise affecting nearly all real estate sectors. Four Texas cities–Houston, Dallas, Fort Worth and San Antonio–are among the metro areas where industrial investors might consider selling properties, according to Ten-X. Suburban Maryland, a region in which the economy has proven sluggish due mostly to low population growth and a floundering professional and business services industry, also made the sell list.

“Houston industrial vacancies reached a cyclical trough near 8% in 2013 with robust rent growth in excess of 4% annually as a strong local economy fueled by high oil prices drove absorption,” Chris Muoio, senior quantitative strategist, Ten X tells GlobeSt.com. “During this time, development activity spiked, leading to a heavy supply pipeline that continues to come to the market. This caused vacancies to plateau near 8% for a while but as oil prices have remained low, and the local economy has cooled, absorption has waned, causing vacancies to rise modestly and rent growth to cool. We expect a limited rise in vacancies to the mid-8% range through 2018  due to this supply and demand imbalance before spiking to levels seen during the last recession in 2020 amid our cyclical downturn model. Rent growth has cooled to half of its peak growth pace, and will continue to see mediocre gains in the coming years as vacancies remain stagnant, before contracting as vacancies spike in our cyclical stress test.”

Overall deal volume for industrial assets fell to $12.5 billion during the second quarter according to Real Capital Analytics, a 26% decline from the same period in 2015. But vacancies have fallen into the mid-8% range, and rents have seen an uptick of about 2% year-over-year.

“The industrial sector is benefiting from the same shifts that are afflicting its retail counterpart. As more and more people choose to stay home to do their shopping, companies need more space to house and distribute the products they sell online,” said Ten-X chief economist Peter Muoio. “While other economic factors are hurting energy-dependent and port-exposed markets, this change in consumer behavior appears built to last, and puts industrial owners in a favorable position for the years to come.”

A majority of indicators show the sector should continue to blossom, as Ten-X Research predicts rents should increase by approximately 3% during the next two years. Vacancies, meanwhile, are likely to fall as low as the mid-7% range in 2018, which would be the lowest since 1990.

Investors should remain cautious, however, as the sector will remain vulnerable to a cyclical downturn on the horizon. Research shows vacancies are poised to rise to around 9% by 2020, while rents are projected to see a decline of about 1% per year beginning in 2019, says Ten-X.