Bottles and Bottlenecks
My neighbor's oven died about 3 months ago and they are still waiting on a replacement due to a shortage in the electrical displays. They're starting to wonder if they will be able to cook a Thanksgiving turkey. A car salesman has a quota of 11 cars per month to sell, yet there are only 3 cars on the lot currently and very few en route. Custom golf clubs that once took a few weeks are now being delayed out 9 months. Stories like these are everywhere right now as supply chain issues take center stage in the news cycle. Consumers who used to never be concerned with how their products arrived are now scratching their heads trying to understand the incredible complexities of the global logistics industry. Chinese warehouse shutdowns early in Covid, EverGiven blockage of the Suez Canal, truck driver and labor shortages, and an eager consumer pumped with stimulus and savings have all been key contributors to the back up in shipping containers that see no real end in sight.
So what does this mean for industrial real estate?
A recent report by CBRE stated that industrial real estate was on track for a new national record, with activity posting a 52% gain yoy(587 million square feet through July). Part of the reasons cited, pointed to transportation costs exceeding those of real estate. Last week, Prologis, a San Francisco-based Industrial REIT's CEO was quoted as saying that they were essentially "sold out" of warehouse product. Think about that for a second! The nation's largest portfolio of industrial real estate is 97% leased and has a record amount of pre-leased signings on the books. The U.S. industrial market posted it's lowest-ever vacancy rate of 4.1% and it's highest price per square foot rental rates. Records are being smashed at incredible rates...
Back in the first quarter of this year we reported that third party logistics companies were beginning to shift their warehousing tactics due to the beginnings of the supply chain issues. The advent of E-commerce created JIT or "just-in-time" delivery to stave off warehousing costs and deliver products quickly after they were imported. As backlogs grew, 3PL's (third-party logistics) shifted to JIC or "just in case" meaning that they would stock product in case of further issues. This transformation has only accelerated as shipping costs rise compared to real estate and has created an even further strain on industrial product. Logistics companies are now stocking shelves again to reduce shipping times as transportation costs soar.
This is all good for landlord and property valuations, but difficult strains on the economy and investors looking for product.
Much like the rest of the nation, Portland industrial assets have benefitted from the rise in consumer demand and lack of available warehouse supply. Overall vacancy for the metropolitan statistical area in the third quarter is running just a tick over 4%, pretty much in line with the U.S. Rental rates have continued to climb as a result, with rates running between $0.80 per square foot per month up to close to $1.00 depending upon quality and location. And there doesn't seem to be much relief in sight for tenants. Positive absorption ran close to 1.5 Million square feet in the quarter with approximately 2 million feet currently under construction. Pre-leasing is running hot as tenants scramble for space.
As rental rates rise, so doesn't pricing. Capitalization rates have been relatively flat quarter to quarter hovering around high-5 to low-6%, but asset prices are rising and trading anywhere from $140-200/per square foot depending upon quality and location. Deal flow has been slow however, as few buildings have actually traded hands. The largest deal sold was the Fry Distribution Center, a multi-tenant distribution center in the Sunset Corridor for $15.4 million or $127/per square foot.
Overall there doesn't seem to be much to change the strong growth in industrial assets. Supply chain woes should only help to increase logistical reliance on warehousing as consumers have grown to expect expedited delivery. The only real threats to the sector would seem to be either rises in interest rates or a shock to the overall economy. A rise in interest rates may not be a bad thing to stave off rampant inflation, but let's hope it doesn't trigger larger economic shocks.
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty Advisors specializing in portfolio and asset management for high net worth clients and institutions. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.
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