CARLSBAD, CA—Industrial investment’s winning streak should extend into 2018, in the view of investors and brokers polled by Real Capital Markets and SIOR. The newly issued Real Capital Markets/SIOR Investor Sentiment Report finds that 90.3% of brokers and investors believe investment activity will remain comparable to recent levels. Slightly less than half believe that activity will increase, even if only marginally; this view was more widely held by brokers than investors.
“The industrial sector continues to draw a wide range of investors, due to its stability and the potential for long-term growth,” says Steve Shanahan, executive managing director at RCM. “That equilibrium and other market dynamics make industrial investment properties the preferred option among a wide range of investors. We don’t foresee a dramatic shift in the near term.”
That industrial has stayed the course for this long is seen as remarkable, RCM and SIOR say, with leasing, construction and investment sales all continuing on an upward trend since 2011. It’ll be at least 12 to 18 months before the rally begins to flag, according to those surveyed.
The sector’s continuing strength across the board might be summed up in a single phrase: e-commerce. Overall, 37.4% identified e-commerce as having the greatest impact on industrial, followed by the general strength of the economy at 34.5%.
Some participants were of the view that “as e-commerce goes, so goes the industrial market.” However, others said the sector’s vitality and success of the market can’t be attributed to any single economic factor.
“One of the most interesting findings of the RCM/SIOR Investor Sentiment Study was the balance in which investment activity is being influenced,” says Tina Lichens, RCM’S COO. “It isn’t just about e-commerce. Across the country, participants pointed to the ripple effect of extended supply chain dynamics, recovery in the housing market and increases in atypical manufacturing operations as driving industrial investment activity.”
Similarly, investors and brokers generally agreed on the factors that represent the greatest threats to the current industrial market’s continuing longevity: overbuilding and oversupply, the lack of quality assets for investing, unrealistic seller expectations.
For investors, the top threats were overbuilding, cited by 40.6% of survey respondents; unrealistic seller expectations (22.9%); and lack of supply of quality assets (17.7%). For brokers, a lack quality supply ranked first at 46.4%, followed by unrealistic seller expectations (14.6%).
Unrealistic seller expectations aside, the study found that investors and brokers all believe pricing hasn’t yet plateaued, although this may occur in the foreseeable future. As with the outlook for investment activity levels, it’s a sizable majority—92.7%, in this case—of survey respondents who believe pricing will at least stay the same. Slightly more than one-third expect appreciation of up to 5% or more.
Even amid an upbeat view of virtually all industrial investment metrics, RICS and SIOR found that expectations for further cap rate compression are more tempered. Over 17% of survey respondents believe there could be some level of compression in the next 12 to 18 months. More than 80%, though, believe cap rates will either remain the same (or increase slightly. One investor respondent opined that the market has “reached the upper limits of pricing,” and therefore any meaningful compression in cap rates would be a surprise.
The study was conducted among RCM principals and SIOR members, augmented by additional research. Click here for the complete report.