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Blackstone, USAA Have Concerns About Industrial Real Estate

Dalfen America Corp. President Sean Dalfen, Blackstone Managing Director David Levine and USAA Executive Managing Director David Buck speak at Bisnow's National Industrial event in Manhattan, Feb. 20, 2018.

Industrial real estate has a lot going for it. Vacancy and cap rates are low, and exploding e-commerce means the demand for distribution centers is high.

But while it seems like the sector can only go from great to even better, it is not all smooth sailing, panelists at Bisnow’s National Industrial Event Tuesday said. Pricing is frothy, construction is costly and labor is short, which are all very real challenges for the sector.

“People need to be mindful of the return expectations they’re going to have,” Blackstone Managing Director David Levine said. "With rising interest rates and supply ticking up slowly, you’re not going to have the same returns you had two or three years ago."

USAA Real Estate Executive Managing Director David Buck said the next 12 to 18 months will bring a plateau in pricing.

“After that, it depends on where interest rates go,” he said. “If they do spike harshly … we may find ourselves in a recession. Certainly, if that does happen, it will be short-lived and not nearly as harsh as in the [Great Recession].”

Last year, land prices for warehouse development increased because of strong demand and the falling supply of viable locations, according to a CBRE report released in December. Land in Northern New Jersey — long considered a cheap alternative — jumped 17% last year, the report showed.

In New York City, there have been several recent, high-profile industrial acquisitions. Two Trees is reportedly paying in excess of $100M for two large industrial sites next door to each other on the Gowanus Canal. One of the country’s biggest industrial owners, Prologis, is reported to have entered into a contract to pay $265M for a warehouse in Maspeth, one of the biggest industrial deals in the city. Still, Prologis CEO Hamid Moghadam said on an earnings call last year industrial supply will start to outpace demand in 2018 for the first time in seven years.

Dalfen America Corp. President and Chief Information Officer Sean Dalfen said there is no way pricing can keep going up in the same way it has been.

“Be mindful, there will be a downturn," he said. "You simply cannot have an uptick and no downturn. Markets are cyclical."

HFF's Jose Cruz, CBRE's Mike Hines, First Industrial Realty Trust's Peter Schultz, Dalfen America Corp.'s Sean Dalfen Blackstone's David Levine and USAA's David Buck

“If you buy the right buildings in the right locations for the right price you’ll do OK," he said. "The challenge is finding those assets … if you are paying more for poorer quality assets, you are going to suffer for it."

While development can be daunting, in this market it is starting to make a lot of sense. But the tight labor and construction costs affecting the entire country are a major hurdle, creating an environment where it is hard to build confidently. In some cases, particularly on the coasts, contractors will not bid for jobs because they simply have too much work, panelists said.

But the issue with labor is not just affecting construction and building. First Industrial Realty Trust Executive Vice President Peter Schultz said many potential industrial buyers say they do not want to be competing with Amazon for workers.

“[They] don’t want to be anywhere near Amazon because they soak up a lot of the labor,” he said, adding that increasing demand is not an immediate concern for him. “I worry about something that shocks demand — we are in a record-low vacancy environment, but if demand slows or stops, we will feel it with supply.”

CORRECTION, FEB. 20, 8:15 P.M. ET: Peter Schultz is an executive vice president at First Industrial Realty Trust. A previous version of this story misspelled his name.