When we are looking at industrial nationwide, our life company correspondents and lenders in general remain bullish overall on placing industrial loans. Cooling from a red hot pace of rent growth is different from a market in crisis. Based on current market conditions, it is underwriting as usual for this asset class.
In fact, for many lenders, industrial under 200,000 square feet and small bay multi-tenant properties are now a still a prioritized asset class leading their allocation targets. They are especially willing to deploy loans towards industrial assets in markets where strong occupancy and continued demand exist.
While we may see some prolonged absorption in the larger footprint buildings, most expect rents to remain strong in the core infill point of entry markets, and while we may see less new starts, we should see available space absorb at a faster pace by 2025 and development momentum pick up again then. A little over supply and higher rates could be a tapering for deliveries and healthy for the red hot rate increases experienced in recent years.
One of the most interesting themes that came out of NAIOP’s I.CON West conference this week in Long Beach was hearing about higher than expected growth of investment in manufacturing in Mexico and the resulting increase in trade between Mexico and US. This in turn will have more institutional lenders who traditionally shied away from tertiary markets and less populated areas of the border states willing to consider industrial properties in these key markets for trade growth.
HERE ARE SOME KEY TAKEAWAYS FROM THIS EVENT:
Economic Snapshot
GDP remains strong, driven by consumer spending.
Aging labor force impacts GDP growth.
Wage growth surpasses inflation.
Consumers show increased confidence, as per Michigan sentiment survey.
Household checking accounts bolstered, surpassing 2000 levels.
Housing Market
Mortgage rates at 20-year highs, stalling the market.
Housing market crucial for general goods and industrial space.
Leading economic index indicators signaling a potential recession.
Unemployment tends to dip before a recession.
Industrial Sector
Retailer profits rebound, inventories clearing.
Retail sales on the rise, absorption expected to increase.
West coast imports at ports improve, slowdown in new deliveries forecasted.
Industrial vacancy to peak in 2024, pushing rents down.
Focus on eco-friendly buildings for institutional tenants.
Capital Markets
Volume down significantly, historic lows in capital raising.
Private acquisitions dominate the market.
Debt side shifts focus to smaller deals.
Life Co and debt funds emerge as leading debt sources.
Development & Investments
Opportunities for distress minimal, optimism on the rise.
Sellers motivated by various factors, diversification among them.
Increasing demand for smaller flex spaces, IOS and data centers.
Supply Chain
Manufacturing job openings concentrated in specific regions.
Nearshoring initiatives benefit Mexico, affecting warehousing needs.
Cold storage facilities offer investment opportunities.
Spec development challenging, push for smaller distribution facilities increasing
Outlook
Development starts decline, vacancy rates expected to rise until mid to late 2025
Lease rate growth anticipated to normalize by 2025.
Challenges include construction, electricity, and water availability.
Continued focus on consumption growth areas for development and investment.
Industrial Real Estate Operations
Proper entitlements crucial, security measures vital.
Multi-tenant operations exist, average lease size varies.
Container take-back business gaining traction.