LOS ANGELES—Panelists on the “Sports Talk Radio” panel—which served as a replacement to the CEO Power Panel—at NAIOP‘s I.CON conference this week had an overwhelmingly positive view of the industrial market, with cap rates compressing and rental rates increasing. (NAIOP is a GlobeSt.com Thought Leader.) However, panelist Jeffrey Phelan, president of DCT Industrial, said, “The bigger question is when do you have the discipline to stop and let the market correct itself? And, how do we do that and when do we do that?” The other panelists, Jim McShane, CEO of McShane Cos.; Carl Panattoni, chairman of Panattoni Development Co.; and Gene Reilly, CEO for the Americas at Prologis, agreed that it was an important question—but didn’t have an answer.
The panel looked closely at industrial markets across the country. Panattoni said that land prices in the San Francisco Bay area, a tight market “governed by the tech space,” are approaching $35 per square foot and that most of the older industrial product is getting converted into lofts. “It is a special spot if you can find a way to play,” he said. However, he also noted that the project analysis is distorted because there is so much money that is chasing product. As a result, speculative building is higher than ever. “These things can change in a hurry,” he warned. “But at the moment, everything looks like it is hitting on all cylinders.”
Southern California is similar to the San Francisco market with high demand and increasing rents, but the biggest challenge in the Southern California market is finding available land to develop. McShane added that the Midwest is behind the West Coast, East Coast and Texas markets, and Reilly said that the Texas market is the only place in the country where supply is getting a little bit ahead of demand. “Supply getting ahead of demand is our biggest fear,” he said. “In most places supply is as in check as it has ever been this far along in the cycle.”
In terms of the types of deals the panelists are doing in this market, it ran the gamut. McShane likes to do build-to-suit projects that have been underwritten as speculative projects, while other panelists noted that build-to-suits are not a no-risk project and that in some markets, build-to-suit projects are being pushed to a premium. Phelan’s company likes new construction and then value-add projects, but says that they aren’t able to compete on the acquisition side.
In talking forecasts, the panelists all saw blue skies ahead for the remainder of the year; however, some said that 2016 would end at an equilibrium. This year, however, there is still room to grow and confidence that rents will continue to increase.
The first day of NAIOP I.CON also included a discussion about the global supply chain, where the weak spots are and how the recent slowdown affected the Los Angeles Port and Long Beach Port.