Dearth of Properties Holding Back U.S. Industrial Sales Volumes
The U.S. industrial real estate market is seeing a shortage of bulk warehouse and logistic centers available for sale along with a shift in focus by industrial REITs from acquisition to development. The resultant flattening in yields will likely produce lower investment sales volumes this year throughout the commercial real estate market – including Philly office space, Philly retail space and Philly industrial space.
U.S. logistics and light industrial properties investment sales volumes fell 13 percent year-to-year in the first quarter of 2017, even though billions of dollars have been raised for real estate investment by global funds. Along with increased real estate allocations in the U.S. and Philadelphia commercial real estate markets by pension funds and other groups, buyers face fierce competition for the few available industrial portfolios and individual assets on the market, according to CoStar’s First-Quarter 2017 U.S. Industrial Market Review and Forecast.
This report on national and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
With the shortage of available industrial property on the market, pricing is at record highs across all tiers. “We’re definitely seeing a bit more caution out there” among investors, said Rene Circ, Director of Industrial Research for CoStar. “While we don’t expect investment sales volume to be higher than last year, we do expect there will continue to be far more buyers than sellers.”
Investors in U.S. and Philadelphia commercial real estate properties have become more disciplined during this cycle, and the duration of low interest rates has gradually adjusted the return expectations of industrial investors, Circ said. Rather than chasing riskier assets in riskier markets, investors appear to be accepting lower going-in yields.
“Appreciation and price growth are slowing and it’s going to be very difficult to get further gains from cap rate compression, especially at the top of the market,” Circ added, “but we will still see very significant embedded net operating income growth over the next couple of years.”
One reason for the deceleration in sales volume regarding both national and Philadelphia commercial real estate listings is a reallocation of capital by publicly traded industrial REITs such as Prologis (NYSE: PLD) and other investors from acquisition to development activity.
“The same money is still flowing; it’s just flowing in a different direction because development spreads right now are very attractive,” Circ said.
The industrial sub index of the CoStar Commercial Repeat Sale Index, bolstered by high occupancy and rent growth, logged the second-highest growth rate in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – at 2.3 percent during the first quarter, just behind retail, according to the most recent CCRSI release.
Comparing current average investor yields among U.S. and Philadelphia commercial real estate listings with forecasted rental rate growths, such markets as those in the Jacksonville, Tampa, and Orlando areas, along with Boston and Chicago, are among a shrinking pool that still present attractive buying opportunities for investors, Circ noted.
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