LOS ANGELES—Industrial investment activity fell in the first quarter of the year compared to 1Q16 by more than 18%. The decline was driven by a supply shortage, according to Andrew Briner, an industrial market expert who recently joined HFF as a managing director with a focus on industrial investment sale transactions throughout Southern California and the West Coast. As Briner settled into his new position, we sat down with him to get an inside look at the industrial investment market, why it dipped at the beginning of the year and what the supply shortage means for market activity.
GlobeSt.com: What has industrial investment activity been like in the first half of the year?
Andrew Briner: Industrial investment sale volumes in the Western US and nationally have experienced a downtick when compared to Q1 2016 by approximately 18.6% and 15.2%, respectively. The Southern CA market followed this trend and posted an approximate 18.8% decline when compared to Q1 '16 volumes. This decline can be attributed to the lack of supply on the market, particularly for scalable Class A logistics product in the port markets. The significant and growing imbalance between supply and demand will continue to be a challenge for buyers, but will enable sellers to push pricing to new levels in primary and secondary markets throughout the greater region.
GlobeSt.com: The Southern California market is becoming intensely competitive in the last few years. How has the dearth of supply and opportunities change the dynamics in the market?
Briner: Southern California's infrastructure is second to none as it relates to logistics and industrial real estate, which has enabled it to become one of the most dynamic industrial markets in the world from both user and investor perspectives. The underlying market fundamentals attract capital globally and create a very competitive buyer landscape. Due to the lack of supply of product, low yield environment and highly competitive landscape, many investors are looking to alternative investment strategies to deploy capital and satisfy yield requirements. We have seen a big push for ground up development to boost investment returns, particularly in the inland empire where there is nearly 28 million square feet under construction. Targeting functional Class B assets in infill markets with proximity to Fed Ex and UPS locations has also been a utilized strategy, as well as investing in non-primary markets like Phoenix, Las Vegas, Reno and Salt Lake City. Additionally, we have seen growing demand from institutions wanting to enter into programatic partnerships with regional operators as a vehicle to invest at a granular level and assemble portfolios in markets with high barriers to entry.
GlobeSt.com: Have you seen new players come to the market? Where are they focusing?
Briner: There is a growing influx of foreign capital investing in the sector in major markets throughout the United States, most commonly through domestic advisors. There have been several massive portfolio trades over the past couple of years, the majority of which had a foreign capital component driving the transaction. In Southern CA, we see foreign capital aggressively pursue one-off large-scale single-tenant assets with corporate tenants. These foreign groups have typically had a minimum deal threshold of $100 million, but given the lack of product and pent up demand, we have witnessed foreign capital pursue offerings as small as $35 million.
GlobeSt.com: What are your clients' biggest concerns?
Briner: The overall outlook for investment is very positive; however, investors' optimism is cautious given that we are now in our eighth year of a global economic expansion and assets have realized appreciation every year since 2009. Property values and lease rates are at record highs throughout the western region and the lack of data points for underwriting and forecasting creates a level of uncertainty; however, market fundamentals continue to be extremely strong, new construction has not outpaced demand like we witnessed during the last cycle, and the capital markets remain relatively disciplined. Although an unforeseen event resulting in economic shock is a global concern, industrial real estate investment in the United States continues to be in high demand and considered less volatile when compared to alternative investments.
GlobeSt.com: What is your industrial market forecast for the remainder of the year?
Briner: Strong market fundamentals and leading economic indicators in Southern CA and the western region will enable capital to continue aggressively investing in industrial real estate. Although the first half of 2017 experienced a dip in transaction volume, we anticipate there to be an uptick in offerings at the end of Q2 and beginning of Q3, some of which will be portfolios of scale. In addition, select investors will be looking to exit non-primary markets in the Western US, creating opportunity for buyers seeking yield. These factors should result in an increase in volume the second half of the year, a trend consistent with what the market experienced in 2015 and 2016.
LOS ANGELES—Industrial investment activity fell in the first quarter of the year compared to 1Q16 by more than 18%. The decline was driven by a supply shortage, according to Andrew Briner, an industrial market expert who recently joined HFF as a managing director with a focus on industrial investment sale transactions throughout Southern California and the West Coast. As Briner settled into his new position, we sat down with him to get an inside look at the industrial investment market, why it dipped at the beginning of the year and what the supply shortage means for market activity.
GlobeSt.com: What has industrial investment activity been like in the first half of the year?
Andrew Briner: Industrial investment sale volumes in the Western US and nationally have experienced a downtick when compared to Q1 2016 by approximately 18.6% and 15.2%, respectively. The Southern CA market followed this trend and posted an approximate 18.8% decline when compared to Q1 '16 volumes. This decline can be attributed to the lack of supply on the market, particularly for scalable Class A logistics product in the port markets. The significant and growing imbalance between supply and demand will continue to be a challenge for buyers, but will enable sellers to push pricing to new levels in primary and secondary markets throughout the greater region.
GlobeSt.com: The Southern California market is becoming intensely competitive in the last few years. How has the dearth of supply and opportunities change the dynamics in the market?
Briner: Southern California's infrastructure is second to none as it relates to logistics and industrial real estate, which has enabled it to become one of the most dynamic industrial markets in the world from both user and investor perspectives. The underlying market fundamentals attract capital globally and create a very competitive buyer landscape. Due to the lack of supply of product, low yield environment and highly competitive landscape, many investors are looking to alternative investment strategies to deploy capital and satisfy yield requirements. We have seen a big push for ground up development to boost investment returns, particularly in the inland empire where there is nearly 28 million square feet under construction. Targeting functional Class B assets in infill markets with proximity to Fed Ex and UPS locations has also been a utilized strategy, as well as investing in non-primary markets like Phoenix, Las Vegas, Reno and Salt Lake City. Additionally, we have seen growing demand from institutions wanting to enter into programatic partnerships with regional operators as a vehicle to invest at a granular level and assemble portfolios in markets with high barriers to entry.
GlobeSt.com: Have you seen new players come to the market? Where are they focusing?
Briner: There is a growing influx of foreign capital investing in the sector in major markets throughout the United States, most commonly through domestic advisors. There have been several massive portfolio trades over the past couple of years, the majority of which had a foreign capital component driving the transaction. In Southern CA, we see foreign capital aggressively pursue one-off large-scale single-tenant assets with corporate tenants. These foreign groups have typically had a minimum deal threshold of $100 million, but given the lack of product and pent up demand, we have witnessed foreign capital pursue offerings as small as $35 million.
GlobeSt.com: What are your clients' biggest concerns?
Briner: The overall outlook for investment is very positive; however, investors' optimism is cautious given that we are now in our eighth year of a global economic expansion and assets have realized appreciation every year since 2009. Property values and lease rates are at record highs throughout the western region and the lack of data points for underwriting and forecasting creates a level of uncertainty; however, market fundamentals continue to be extremely strong, new construction has not outpaced demand like we witnessed during the last cycle, and the capital markets remain relatively disciplined. Although an unforeseen event resulting in economic shock is a global concern, industrial real estate investment in the United States continues to be in high demand and considered less volatile when compared to alternative investments.
GlobeSt.com: What is your industrial market forecast for the remainder of the year?
Briner: Strong market fundamentals and leading economic indicators in Southern CA and the western region will enable capital to continue aggressively investing in industrial real estate. Although the first half of 2017 experienced a dip in transaction volume, we anticipate there to be an uptick in offerings at the end of Q2 and beginning of Q3, some of which will be portfolios of scale. In addition, select investors will be looking to exit non-primary markets in the Western US, creating opportunity for buyers seeking yield. These factors should result in an increase in volume the second half of the year, a trend consistent with what the market experienced in 2015 and 2016.
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