Industrial Is Hitting on All Cylinders

File Type: Free Content, Article
Release Date: June 2015
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ICON 2015

Even though the market is beginning to look “frothy,” these are the best of times for industrial real estate--but what happens if interest rates suddenly jump and alternative investments become a better buy, asked Carl Panattoni, chairman, Panattoni Development Company Inc.

“Right now, the amount of money chasing deals is high, but if interest rates start going up, what happens to alternative investments? That is one of the big fears that we all have. At the moment, things seem to be hitting on all cylinders,” he said. Panattoni estimated that even though the market is frothy, the “only adequate performance of the economy” [not that great, but not that bad] will probably give the industrial real estate market “legs over the long run as opposed to burning out fast.”

Panattoni was part of a panel at I.CON, The Industrial Conference, June 10-11, 2015 in Long Beach, California, titled “CEO Power Panel: View from the Top” that also included Jim McShane, CEO, McShane Companies; Gene Reilly, CEO, The Americas, Prologis; and Jeffrey Phelan, president, DCT Industrial. The session was moderated by James Klein, president, Klein Commercial.

Other key takeaways on the industrial market from this session:

  • More spec development to come. With portfolios and projects selling for 25 percent or more over replacement and rents rising, developers have a renewed appetite for spec development, according to the panel.
  • Build-to-suit development still make sense. Even though spec development is picking up steam, build-to-suits are preferred among tenants enabling them to operate more efficiently in tailored buldings.   McShane,  is apparently enjoying the best of both worlds: “When we buy land, we want to build spec; we want to get it entitled and go,” he said. But, fortunately for McShane, as development of a would-be spec building gets underway, a tenant usually steps forward who wants to make a deal. “The last five out of six times we have done this,” he explained, “we wound up with a build-to-suit. We [then] have a choice: we can build a spec building or demand a higher price for a build-to-suit.”
  • More cap rate compression ahead. Phelan sees more cap rate compression ahead: “We have not seen a trend where that compression has stopped, so the momentum leads me to believe that it will continue.”
  • Value-add and development activity increasing.. Phelan said that his firm is doing more new construction today than two years ago, followed by value-add projects, “but we can’t compete on the acquisition side.”
  • Market equilibrium seen for 2016. Reilly said that there will be excess demand for industrial for the remainder of 2015, which will continue into 2016. But in 2016, supply and demand should come into equilibrium.