Debt markets frozen, local pushback shaking industrial cash cow
Industrial real estate owners continue to benefit from robust demand, low vacancy rates and a shift in consumer behavior towards e-commerce that continues to fuel the asset class – but a host of challenges threaten to bring more difficult times.
Trammell Crow Co.’s Andrew Mele and EverWest’s Krystal Arceneaux at the Northeast Industrial Summit in Bisnow on October 18.
Frozen debt markets make deals nearly impossible to fund, panelists told Bisnow’s Northeast Industry and Logistics event this week, held at the New York City Bar Association in Midtown. The rising interest rate environment is generating uncertainty that scares off some investors.
Adding to this challenge for developers are local communities who are speaking out against warehouse development with more vigor than ever. But to combat all of this, they said, there is a deep pool of companies that need more logistics space.
“I’ve never been in a market where we have 2.5% vacancy and you can’t find a financial partner,” Andrew Mele, chief executive of Trammell Crow Co., said at the event. “That’s the most interesting thing. And I get it, people say, ‘Hey, let’s not catch a falling knife… let’s wait six months. “”
Demand may be down, but the warehouse market remains historically tight. The national industrial vacancy rose in the third quarter to 4%, just above the all-time low of 3.9%, according to Savills. Leasing activity fell below 200 million square feet for the first time in eight quarters.
The slowdown was driven by inflation and interest rate hikes weighing on industrial tenants, but Savills called the drop in leases only a “limited” sign of a cooling. Tenant-focused brokerage expects rent growth to slow after peaking at 40% in some markets last year.
Amazon has makes waves in the industry over the past year after the closure and cancellation or postponement of plans for dozens of future facilities. As he withdrew, panelists said other types of businesses have responded to some of that demand.
“Two years ago, [tenant demand] was heavy e-commerce. It was Amazon, Amazon and Amazon,” Turnbridge Equities managing director Ryan Nelson said. “It really rocked last year. And now it’s largely [third-party logistics] it is the engine of the market.
AKF Group partner Debbie Reider said she has seen an increase in demand for fresh food in urban markets. DH Property Holdings development manager Michael Bennett said his company is seeing significant demand from adjacent logistics users, such as those shipping parcels.
Shike Goedar of Arden Logistics Parks, Dave Greek of Greek Development and Larry Schiffenhaus of CBRE
Panelists said strong demand is affecting the sales market for this type of industrial property, making sellers less likely to move on price, even as borrowing costs have soared this year.
Realterm VP of Investments Ben Andreycak predicted the stalemate could last nine to 12 months as the bid-ask spread remains stubbornly high.
“I think everyone here is still looking for deals, but the bar has risen to a point where, because of the debt market, because of the cap rate assumptions, the deals that we think are bargains are a far cry from where sellers have been seeing prices for the past three to four years,” he said.
Prologis, the largest developer of industrial properties, said in its income statement this week that it expects a decline in sales and speculative development in response to the funding environment.
At the event, Prologis chief executive Fritz Wyler said he expects a period of lackluster activity and then a serious return in trading volume as buyers with access to liquidity that have already been forced out of the market are being offered opportunities.
“I think a lot of people are now starting to look around waiting for markets they couldn’t get into,” he said. “Jersey is still a market, LA is still a market, even Miami today. People want market share, and they’ve been stuck because there’s 20 to 30 bidders on something.
Ben Andreycak from Realterm, Fritz Wyler from Prologis and Marc Duval from JLL
What’s shaping up to be more problematic for industrial developers than capital markets is the community’s growing aversion to warehouse development, panelists said.
This is a problem that has arisen in the busiest warehouse market in the country, Inland Empire of Californiawhere several cities have voted to temporarily ban warehouse development amid growing frustration over the impact of this type of development has on communities.
“I think the financial side is going to hedge somehow,” said Steven Beyda, head of acquisitions at Woodmont Properties. “I think the one thing that we in this room can’t really control is the legislative and administrative process, with cities in the state of New Jersey, in particular, becoming extremely anti-warehouse. As a group, we need to do a better job of facing the community and presenting the value and benefits of industrial markets to the state itself.
He said this issue is going to be the biggest challenge for industrial construction over the next decade. Just last month, Queens Council member Tiffany Cabán has approved a major development in Astoria called Hallets North, saying it will revert to last mile distribution if she does not give the developer wishing to build a 1,400 unit development there approval necessary. Last year, Two Trees Management threatens to sell its Brooklyn site to a logistics developer if it does not obtain the required rezoning to build a 3.5-acre mixed-use project on the Williamsburg waterfront that will include more than 1,000 residential units.
“Fifteen years ago when we went to a city, our pitch was very simple: it was jobs and taxes, right?” said Dave Greek of Greek Development. “That’s what we bring to your town and, by the way, we don’t bring housing, so we don’t bring kids to your schools. But as e-commerce has grown and people have become more familiar with how these facilities work and recoil has become much more popular and much stronger…we make different design decisions, and we certainly approach the cantons a little differently. “