Industrial Demand, Development Hit All-Time Highs
The scarcity of space, while not uniform across the country, has also spurred significant investment — and boosted property values ever higher.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!It’s no secret that industrial commercial real estate is in demand. As more and more investors turn to this so-called “darling” sector, so too are developers. In its March national industrial report, Yardi Matrix points out that even coming off a year of massive deliveries — upwards of 350 million square feet came online in 2021 — significantly more is on the way, with close to 600 million square feet under construction at the end of last month. And beyond that, another 625.5 million square feet are in planning stages, a pretty strong indicator of developer appetite and confidence for the future.
And, of course, this new space is being absorbed at a staggering pace. While it’s easy to point to e-commerce behemoths like Amazon as the real driver of industrial leasing activity, this doesn’t give the full picture. Strong growth in the logistics sector as a whole has led to more and more high-end space being gobbled up by large firms, it’s true. This has had an end result of even smaller companies finding it more and more difficult to find a place to rent, as vacancy lows drive absorption downstream into Class B and even Class C assets. However, this notably isn’t happening everywhere.
Industrial markets near ports have by far realized the most growth in leasing activity and the greatest dips in vacancies. Take the Inland Empire, for example. While it may not technically qualify as a port market, its proximity to the ports of Los Angeles and Long Beach have kept vacancy shockingly low — the market stood at 0.6% vacant in February. Rental rates have, understandably, taken off, up 6% year-over-year through February, one of the highest growth rates among U.S. markets.
Looking to the East Coast, the New Jersey industrial market has faced similar pressures, though perhaps not to quite such an extreme. With vacancies at 3.7%, and rents rising 5.5% over the year, space is clearly in demand.
It isn’t just development, though. Higher rents also translate into stronger interest from investors to get into the game, with strong rental growth a good predictor of a smart investment — driving significantly higher cash-on-cash returns and overall investment yields. The Matrix report states that sale prices averaged $125 per square foot in January and February, set to mark six straight quarters of solid growth — and a 50% increase from quarter three of 2020.
Seattle was top of the list for sales prices, with $79 million in deals closing in January and February at an average of $357 per square foot. Investment volume overall appeared a bit scattered, however, with the largest amount of industrial real estate transacted in Philadelphia ($725 million), Chicago ($689 million), and New Jersey ($603 million) during that same period.
Related Questions
What are the current trends in industrial real estate development?
The industrial real estate sector is currently thriving, driven by the rise of e-commerce and the ever-greater role logistics providers play in our lives. According to a second-quarter report from JLL, leasing activity for logistics, distribution, and third-party logistics continues to fire on all cylinders. Additionally, manufacturing is seeing a resurgence due to the increase in demand for electric vehicles.
At the end of June, there was 77.2 million square feet of manufacturing space underway nationwide, with a staggering 58% directly related to electric vehicle parts or assembly operations.
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What are the benefits of investing in industrial real estate?
Investing in industrial real estate can provide a number of benefits, including potential tax advantages, increased cash flow, and potential appreciation. Industrial real estate can provide investors with a steady stream of income through rental payments, and the depreciation of the property can be used to offset taxes. Additionally, industrial real estate can appreciate in value over time, providing investors with a potential return on their investment. Industrial real estate can also provide investors with a hedge against inflation, as the value of the property is likely to increase with inflation.
Industrial real estate can also provide investors with a number of tax advantages. For example, investors can take advantage of accelerated depreciation, which allows them to deduct a larger portion of the cost of the property in the first year of ownership. Additionally, investors can take advantage of the mortgage interest deduction, which allows them to deduct the interest paid on the loan from their taxable income. Finally, investors can also take advantage of the 1031 exchange, which allows them to defer capital gains taxes when they sell a property and reinvest the proceeds into another property.
What are the risks associated with industrial real estate investments?
Industrial real estate investments are generally considered to be a higher-risk investment due to the potential for tenant default and the longer lease terms. Leasing velocity is much slower than in multifamily or single-family residential real estate, and so a vacant building may take longer to completely fill than a residential property. Additionally, there are other exterior and interior considerations for industrial investments, such as the need for top-of-the-line loading equipment, that can represent a significant value-add opportunity for an industrial real estate investor. Repositioning a dated industrial facility can be one of the surest ways to earn a strong return on your investment, but it also carries a certain level of risk.
What are the best financing options for industrial real estate investments?
The best financing options for industrial real estate investments depend on the size of the investment and the desired amortization. For investments of $1,000,000 or more, Commercial Real Estate Loans offers a variety of full capital stack financial solutions, including CMBS, Life Company, Bank Loans, and Small Balance Loans. Loans can have amortizations as long as 30 years and leverage up to 75%. For more information, head to our portal and our advisors will connect you with a wide variety of lenders to get a quote at no charge.
What are the most important factors to consider when financing industrial real estate?
When financing industrial real estate, the most important factors to consider are the loan amount, the loan terms, and the type of loan product. Many types of financing may be available, such as traditional bank loans, SBA loans, and private money loans. For more information about what loan may be right for your situation, head to our portal and our advisors will connect you with a wide variety of lenders to get a quote at no charge.
What are the advantages of using a commercial mortgage broker for industrial real estate financing?
Using a commercial mortgage broker for industrial real estate financing can provide several advantages. Brokers are generally well-positioned to provide critical information about the types of financing available to you, and their expertise is often concentrated within an asset type in a specific market or even submarket. Additionally, brokers can help you get better loan terms than you would be able to get on your own. For example, they can help you find lenders who are willing to offer lower interest rates, longer loan terms, and more flexible repayment options. Finally, brokers can help you navigate the complex landscape of commercial real estate finance, saving you time and money in the process.
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