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Monday, August 19, 2013

Industrial Investment Activity Continues, Favorable Fundamentals

By: Erik Foster (Chicago)

We have seen consistently steady industrial investment sales activity across the country and I believe it will continue well into 2014.  Quantifiable leasing data as demonstrated by increasing rental rates and positive absorption are helping to shore-up assets that were once waning because of low cash flow and depressed rental rates.  These are indicators that the industrial market has stabilized and is poised for continued recovery in the latter part of 2013 and beyond. This is also driving investment sales activity as investors look for stable cash returns on core properties.  What’s more, they are looking for future yield from B assets that provide an opportunity to reset existing rents at much higher rates in the coming years; an industrial building with tenants who signed leases in 09 & 10 is looked upon very favorably by investors.

The increasing prevalence of class B industrial assets investment sales is a key investment trend to watch during the rest of 2013 and into 2014. A shortage of core product, significant demand from capital (both equity and debt) historically low debt pricing and expectations of the afore mentioned rental rate increases that could boost investor returns, are creating an environment that allow B assets to trade.  We are seeing this trend in the assets that we are selling across the country.  In fact, we are seeing these kind of investment being looked at by new money sources such as Canadian and international capital, causing further competition for product and higher pricing. 

The shift in focus for many to the Class B market is also due in great part to the large spread in cap rates between class A and class B product. Most class B transactions are trading near 8% cap rates and below in many markets.  This spread is historically wide, 200-250 basis points in some markets when compared to A product.  Also, A product returns are so low in comparison to B, even nominal moves in interest rates like we had recently can create a ripple affect in the buyer pool resetting these A deals to lower pricing levels, moving cap rates up, and further compressing the spread between A & B industrial assets.  

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