- November 08, 2019
After reaping the benefits of the sluggish retail and office markets over the last few years, the industrial sector showed signs of a slowdown in the second quarter of 2019. Ten-X Commercial’s Industrial Market Outlook for Fall 2019 takes a look at the key indicators that suggest the market is contracting and reveals why it’s not necessarily a cause for concern.
Oversupply Overpowers Demand
One factor influencing the cooling trend is the diminishing demand for industrial space, coupled with oversupply. Analysts expect vacancies to rise as completions continue to exceed absorption. This trend is most notable in areas where developers overbuilt in anticipation of the growing need for call centers and warehouse space, or as a way to attract new business to their cities.
An analysis of market outlooks concluded that the most affected region appears to be the Southeast, which is where half of the downgrades took place. For example, Atlanta and Nashville both saw rapid growth in their industrial supply. These buildings may sit empty until the market can support the available space.
However, the transition to e-commerce and cloud computing models that fueled the development of all this industrial space is not contracting. Demand for buildings to house inventory, call centers, and technology support systems still exists and will likely continue. In addition, as states legalize marijuana, suppliers and retailers are creating a new market for CRE owners who can provide them the warehouse and retail space they need for their operations.
Activity in the industrial sector has increased in key parts of the country, including California, Florida, and New Jersey. Three of the top five buy markets are in California (Sacramento, Los Angeles, and San Diego). The remaining two are in Palm Beach, Florida, and Phoenix, Arizona. The top five selling markets in San Antonio, Dallas, Pittsburgh, Seattle, and suburban Maryland.
It’s All About the Timing
Deal volume did not budge much in the second quarter. Yet, this may be the result of timing instead of long-term trends within the sector. There’s no doubt that trade tensions between the United States and China, along with international tariff wars, are affecting manufacturers, importers, and exporters.
The risk created by this uncertainty, though, should have the most significant effect near ports and regions that depend heavily on manufacturing, and may not spread across the country. For now, rents are at an all-time peak, and rent growth persists even amid these challenges. Although valuations have dropped since 2018—and may dip even lower—they should rebound again within the next two years.
Opportunities for Buyers and Sellers
The end of the year may be the prime time to engage CRE buyers and sellers interested in industrial properties. In previous years, activity increased during this time as sellers look to shed assets and close deals before the year ends. As available inventory expands, buyers should find a greater variety of properties instead of the redevelopment and value-added assets that seemed to dominate earlier in the year.