DENVER—The industrial sector nationwide is seeing declining vacancy rates and increased development, which has caused cap rates to drop since the beginning of the year, Bill Hankowsky, chairman, president and CEO of Liberty Property Trust in Malvern, PA, tells GlobeSt.com. Hankowsky will be speaking on the industrial development panel during NAIOP’s Development ’14 conference here later this month, and we spoke with him about the trends he is noticing in this realm.
“There are a handful of trends that everybody is focusing on,” says Hankowsky. “One is simply that the fundamentals of industrial space are solid and remain so. There’s a good demand for industrial space, absorption remains positive each quarter, vacancy is down nationally and rents are going up nationally.”
The second trend Hankowsky mentions is that development in the industrial arena is rising. “People need new, functional, state-of-the-art space in the size and configuration that they want it. Development is back apace across almost every market, which is both a ‘glass is half empty’ and ‘glass is half full’ situation: developers are glad to be back in the business of developing, and a number of us feel it is disciplined development, but contrarians are nervous that there will be too much development and it will undercut market strength and sector growth.”
The third trend he notes is the issue of declining cap rates, which has to deal with how in-demand this sector has become. “The fact that industrial is a very highly sought-after after class is stimulating lots of capital to the space. Cap rates are lower today than they were at the beginning of the year.”
E-commerce is another obviously huge trend, which is creating a new source of demand, says Hankowsky. “There are different logistic networks for various companies. In some cases, buildings are being constructed closer inside the metros, and there is constant thinking by our customer base about how to better store, handle and distribute their product.”
When asked about one of the latest trends we’ve heard talk about—companies setting up distribution centers within or behind retail centers for easier consumer access—Hankowsky says, “I think this is a trend, but is it a big trend? No. It’s another idea being tried.”
He says that regarding which inning we’re in with e-commerce, “I don’t even think we’re in the third inning. We’re early in the game. Roughly 10% of retail sales are done online, so it’s still a small percentage of all sales, and most of that is done by an e-commerce center via home delivery. It’s happening inside a ‘warehouse.’ But Amazon is thinking about whether they should offer same-day delivery. If so, they need to cut down travel times. This draws them closer to the core of a metro, where they’ll build a 200,000-square-foot rather than a 1-million-square-foot building. Some retailers are the distribution point, but they’re not going to create an e-commerce building exactly; rather, they’ll take the order and have you pick it up at a store, and that might work for some products and not for others. For example, some people buy diapers and paper towels online, but they may not buy clothing, electronics or other products online. They’re not going to put a 30-foot-high warehouse space in a mall.”
Hankowsky says there’s a lot of interest from investors in how the space is doing, and it’s viewed as very favorable. “A year ago, it could have been apartments. But the industry is seeing historically low cap rates in many markets for industrial now. We’re blowing through the peak, which clearly creates discussion and buzz, especially with interest rates rising.”