Industrial’s Continued Growth
Industrial real estate is a hot commodity thanks to the growing demand for last-mile delivery from elevated e-commerce sales, and as the internet continues to rely on data centers and logistic companies to expand their reach. As a result, leasing activity and rent growth have seen incredible numbers in 2022. But, how long will industrial continue to grow at this rate? Is it sustainable?
Is a Bubble Forming?
Investors are keen on claiming their stake in the industrial sector despite the interest rate increase with rents outpacing inflation. Coastal markets have seen the most significant rent increases, with some recording the largest lease spreads between new and market rents. For example, new leases in Los Angeles average $14.53 per square foot, compared to $10.57 per square foot average for in-place rents. According to Commercial Edge, Los Angeles has the second-highest average industrial rents in the nation, right after Inland Empire. Some experts believe this to mean that the industrial bubble may not pop as demand has kept up with the rate of inflation.
Conversely, others argue that investors will be diverted from the high rents per square foot. Some tenants have already begun to build their own warehouses, such as Amazon, and manufacture their products domestically. This could translate to market adjustments, returning pricing back to pre-pandemic values as demand normalizes. Experts claim that rents cannot continue to grow at this rate, and if they do, they will eventually hit a ceiling and retract, which will cause the bubble to pop.
Inflation’s Role in Cap Rates
With borrowing rates increasing 150 basis points so far into the year, commercial mortgage-backed security loans for industrial properties have risen from three percent to five percent in June 2022. Yet, this has had minimal impact on industrial property pricing, with cap rates and transactions remaining steady.
Though industrial is a strong-performing asset class, basic supply and demand economics will eventually come into play, and rents will inevitably decline while values and cap rates rise.
