Move over, multifamily--industrial may be the next growth wave. PPR senior real estate economist Shaw Lupton has been advising institutional investors to get into the sector, and he told us why.
1) Demand
San Antonio saw a strong 2M SF of net positive absorption last year, while Austin pulled in 800k SF. Shaw predicts smaller growth this year for both markets, however. Nationwide, 2012 was a sluggish year absorption-wise, but ended on a strong note with net 78M SF (in line with 2011). Q4 set a record for US warehouse demand. (Warehouses were 2012's hottest Christmas gift.) He expects this year will look slightly stronger (but not by a lot thanks to economic headwinds).
2) Ability of supply to shut down quickly
Coupled with strong demand, almost nothing is under construction now. (Just a lot of bored cranes, sittin' around talkin' about the old days.) Last year saw negative net completions nationwide as the pace of space removals more than offset deliveries. This year is ramping up with 35M SF in the ground, but thats only 0.3% of inventory. (And 55% of that is BTS.) Thats barely up from the trough and well below the last cycle, when we added 1.5% annually. He expects construction will ramp up rapidly over the next year or two as rents increase. Meantime, theres a great window where investors can benefit.
3) Outsized rent growth
Net asking rent in San Antonio rose an impressive 8% last year; on the other side of the coin, Austins rates only rose 0.4%. Shaw does expect Austins rents will pick up in the coming quarters. Things arent looking as bright nationwide: Were 8% below the long-term trend. But that means a significant upside in asking rents today.
4) Below replacement cost
Nationwide, overall pricing per SF is 12% below the long-term trend. And there are plenty of opportunities to acquire product below replacement cost here: Both Austin and San Antonio are beating the national stats. Austin transaction prices are 17% below their long-term trend on a price per pound basis, and San Antonio is 13% below it.
5) Cash yields
Industrial yields are some of the highest of the four main food groups. Although warehouses may seem a little pricey, theyre worth it thanks to strong fundamentals. Warehouses arent known for their growth, but Shaws tracking 3.8% yields (after adjusting for below-the-line expenses) now. Thats about 23% better than office yields, which is driving players from other sectors into the industrial arena.
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