There Is Still Room for Industrial Cap-Rate Compression

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San Diego

Regardless of tariffs and trade disputes or the upcoming presidential election, industrial activity is expected to remain healthy through 2020. Most investors are planning to continue to remain active buyers in major markets, and while pricing is already reaching peak levels, there is still room for more cap-rate compression. Secondary and tertiary markets, like Phoenix and Las Vegas, in particular are the best candidates for cap rate compression in 2020. In major markets, the asset class will perform similar to 2019.

“We expect the industrial investment market to continue at a steady pace through 2020, with deal flow and pricing being similar to 2019. There are some markets where further cap rate compression is expected, including some secondary and tertiary markets where investors see added opportunity for deal flow,” Tina Lichens, COO of San Diego-based Real Capital Markets, tells GlobeSt.com.

There are some concerns on the horizon, but overall, the strong underlying fundamentals remain and will continue to create opportunities. Those fundamentals include e-commerce activity and demand—which is continuing to grow—and increased supply chain efficiency. Secondary markets with population growth are positioned to benefit the most from these trends. “While there is much activity from corporations expanding or realigning facilities to increase supply chain efficiencies, the big boost is coming from e-commerce,” says Lichens. “E-commerce activity is expected to grow by 10% or more a year for the foreseeable future, which translates to demand for more warehouse and distribution space, particularly in markets with strong population growth.”

For large warehouses and distribution facilities, major metros are positioned to benefit from this growth. Major metros are already densely populated and need access to logistics facilities to service the population. “We’re seeing this in a big way in large population areas, such as Manhattan, where there are many developers trying to fill demand for last mile warehouse space to tap into that large consumer population,” says Lichens. “Investors are also watching those urban redevelopment areas, looking for opportunities to get in early and ride the wave of e-commerce from a rent growth standpoint.”

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