What Could Slow The Industrial Market? 'There's Always A Black Swan Event'
The market for industrial property has been booming nationwide, but especially in South Florida, where developable land exists only in a 20-mile-wide strip between the Everglades and the Atlantic Ocean.
Experts speaking on a Bisnow panel last week marveled at the growth of the sector, but also warned of "black swans" — unpredictable events with major consequences.
Locally, the industrial sector has seen positive absorption for six years straight, with vacancy rates hovering around 4% for four years. Population has been a key driver: some 900 people per day move to Florida, between 200 and 300 of them to South Florida. Prices have risen from about $200K per acre to $1M per in about 30 years, the panelists at Bisnow's South Florida Industrial & Logistics Update said.
If 4 million people will arrive in eight or nine years, and each human consumes roughly 50 SF of consumables annually, McCraney Property Co. CEO Steve McCraney said it feels like the run could go on forever.
"Deloitte just ran a study that 75% of people think that three-day delivery now is way too slow," McCraney said. "Not withstanding, there's roughly $287B looking for industrial product in the U.S. today. How could we ever have a recession, right? But there's always a black swan event, and I think we just stay tuned."
McCraney said his concerns include overbuilding, geopolitical risk, supply chain consolidation, construction costs and tenant improvement costs.
"Every time there's a Trump trade blip, I wake up and kind of freeze for a minute because you worry about the impact on the ports, right? If trades suffers, demand is going to suffer," he said. "I think about manufacturing and what happens with 3D printing. Because it's going to get bigger and bigger and bigger. And because of that, will there will be more on-shoring of product? Which means there's going to be less storage of product."
PortMiami Head of Business Development and Marketing Don Wrinkle said Miami has long been the world's busiest port for cruise ship passenger traffic — it recently took 20 acres from its cargo area to build additional passenger terminals. Cargo is strong, too.
"We did 28 million stems of flowers through the port of Miami last year. In the first quarter, we're already over 34 million stems, so we'll be over 100 million stems [this year]," he said. But, he added, "our primary issue that keeps us on our toes and keeps us up at night is security. We're doing probably 60 to 70,000 people through the port in a day with the passenger ships that we have and the cargo ships that we have."
The airport does about 100,000, he said. The port has 350 or 400 cameras on-site, plus law enforcement officers from local and federal agencies.
Duke Realty Vice President Stephanie Rodriguez called the competition among industrial developers "very frothy."
"It's hard to sit back and watch other people beat you out time and time again," she said. "But, you know, we're a publicly traded REIT. Our risk tolerance tends to be a little bit lower. We've got ample cash, but it's easier for me to stay disciplined because of corporate guidance, I guess you could say. But it's hard to watch that. It really is, and you start to re-evaluate what your risk threshold is."
Butters founder Malcolm Butters said private equity players — particularly the mid-market investors from small shops in New York or other major markets — are driving prices beyond what traditional metrics suggest is wise.
"The entrance of a large amount of the private equity real estate players is troublesome because of the risk tolerance. Risk tolerance is extreme," Butters said. "And I'm not talking about like the Blackstones, I'm talking about the smaller guys who just raised $200M and will come in and start buying up sites in core markets, pro forma-ing numbers that don't exist yet today. Very high risk tolerance for no due diligence.
"As those guys keep coming into the market — and I believe that there'll be more of them soon — you're going to see things get even more challenging for the Steady Eddie, you know, developers who are local and really understand where the market is, where it's going."
Butters also said there could be a black swan event, but pointed to the Federal Reserve's signal that it could start lowering rates helping to draw out the end of the cycle. Monday marked the day when this became officially the longest economic expansion in history.
CBRE Senior Vice President Larry Genet predicted that any recession "will be a blip, and two years will go by and everyone will get right back at it."