Buyers now consider the US industrial market one of the best sectors for new investments. But while the purchases of huge class A bulk distribution buildings grab most of the headlines, the multitenant warehouse segment has grown in importance for institutional investors. These buildings are smaller, usually 200,000 square feet or less, and typically occupied by local and regional distributors. And the growth of e-commerce has meant a significant change in their prospects.
“That final mile touch point has become much more important,” Jason Tolliver, the head of logistics and industrial research for Cushman & Wakefield, Americas, tells GlobeSt.com. Distributors still need the big suburban centers, of course, but smaller facilities closer to the customer base are now just as necessary. That new demand, added to the simultaneous growth occurring among the sector’s longstanding tenant base, has sent rents and occupancy rates soaring. “This product type has really excelled.”
In fact, in 2017 multitenant distribution buildings boasted year-over-year rent growth of 6.2%, the highest of any property type, according to a new spotlight research report from C&W. By comparison, the bulk distribution sector saw rent growth of 4.3%. Meanwhile, office saw a 4.2% increase and retail shopping centers hit just 2.8%. And the occupancy rate for multitenant distribution buildings reached 97.3%, about 250 bps higher than the bulk distribution segment, though both are at historic highs.
Some investors worry that tenants in any sector will drop out and move when faced with such robust rent increases. But Tolliver says “rental increases are not deal breakers,” at least in this sector. “Rent growth is only 5% of supply chain costs,” and operators spend far more time worrying about the costs of labor and transportation.
Furthermore, “a good portion of the vacant space is in older, largely obsolete product.” And unlike the bulk distribution buildings, which developers can plant on open suburban fields, these buildings are usually wedged into dense urban areas that restrict new industrial development. “There just aren’t a lot of places to go.
The amount of capital pouring into multi-tenant industrial buildings has greatly increased, and the sources are more diverse. Data by Real Capital Analytics, Cushman & Wakefield.
As a result, “the appetite for this product is immense,” according to David Bitner, C&W’s head of capital markets research for the Americas. In the past, most buildings were bought with private capital. “But now we’re starting to see institutional money. Everyone wants to be a part of this shift to same-day delivery.”
Even foreign capital, which historically targeted office, retail, and hotels in gateway markets, “is now red hot on industrial,” says Bitner, including the smaller buildings. In 2007, private investors comprised 55% of all transactions in multitenant distribution buildings, C&W says, and offshore capital accounted for only 4.7%. By 2015, however, the share of private investors slipped to 43%, while foreign buyers increased their share by more than fivefold to 27%, although Bitner says much of that was due to Singapore-based GLP’s big portfolio buy that year.
According to the C&W report, the sector’s value “on a per-square-foot basis is approximately 20% higher than the broader warehouse market with pricing continuing to increase. This segment realized a total return of 13.3% in 2017, well ahead of the overall commercial real estate return of 7.0%.”
And with all of this competition, Bitner believes the focus of many investors could soon broaden. “I am encouraging investors to look beyond the major markets.” Currently, most spend a lot of time evaluating properties in NJ, Atlanta, Dallas, Chicago, LA and the Inland Empire, among a few others. A wider horizon would make sense for industrial, as e-commerce is a national phenomenon transforming every market. But many investors cling to old habits. “I think we are starting to see change, but it has a further way to go because institutional capital is somewhat conservative.”