A wave of tremendous momentum in the industrial real estate market is showing no signs of crashing anytime in the neat future, according to analysis recently issued by JLL.
The industrial real estate firm pointed to myriad factors for better than good market conditions in 2016, which it said are likely to continue in 2017, including: low interest rates, strong consumer spending, and e-commerce activity continuing to heat up. And on top of that JLL cited how potential future infrastructure investment, coupled with continued company expansion, could serve as demand drivers for future warehouse and distribution center development, too.
“Things continue to be on a nice roll seem to be on a pretty good path relative to continued stability in the market, said Craig Meyer, President of JLL’s Industrial group. “Demand seems to be continuing at a strong pace and is up annually in 2016 as we are looking at nearly 250 million square feet of absorption, which is ahead of last year’s 230 million square feet. We also have a continuing decline of vacancy rates in just about every market, and we are seeing increasing lease rates and rising rents, which is what happens when there is a declining vacancy rate, which is at 5 percent and could go lower than that at some point.
While there is nothing as a huge threat, Meyer said there are some things requiring a watchful eye in the market.
One is a new Presidential Administration, which, he said, appears to have a more pro-business environment that should continue to provide growth, especially with the proposed infrastructure spending, which could provide a good economic stimulus, especially in markets up and down the Mississippi River, an area he said is trade and transportation-heavy.
Something that needs to be monitored, though, looking ahead, he noted, is the relationship between the 10-year treasury rate and average cap rates, for industrial and commercial real estate sales, which is how industrial real estate firms value buildings and is something that potentially could have an impact on the market.
“People talk about cap rate compression and talk about the spread between the risk free rate and the cap rate, so wherever that spread is that distance,” he said. “Cap rate compression with a 0 percent interest rate is pressing down towards that. With rising interest rates, there could be an increase in the 10 year treasury bill rate, which means cap rates could rise in certain instances and values could decrease a bit, but even were that to occur, the rise in industrial lease rates could offset some of that, which so that is a continuing positive of market fundamentals.”
Meyer said the overall outlook for 2017 is positive in terms of leasing, and even though construction is up, nearly 50 percent of all construction is committed or leased, adding that the increase in speculative development is not significant from 2016 to 2017, with most market fundamentals being in balance.
In its analysis, JLL pointed to five primary factors that it said will impact the industrial real estate sector in 2017: