Industrial Real Estate. Popular with investors and lenders. Here’s why.
Industrial real estate throughout North America is undergoing a renaissance of sorts with investors and lenders.
Why is this so?
Real Estate returns are changing
- We are in a slow growth economy. The more traditional real estate assets, like retail, office and multi-family residential, while still popular, are possibly losing a bit of their appeal. Online shopping is taking its toll on traditional real estate. Office markets are overbuilt in many markets, leading to a flight to quality for tenants. Owners of B class office product are scrambling. Multi-family property prices have risen to heights never seen before. Cap rates for these assets are very low, making acquisition costly. When you couple this with aging multi-family stock, and rent controls in many markets, returns are modest at best. In summary, it is increasingly difficult to create and extract value from traditional commercial real estate assets. Investors know this. Lenders do too.
eCommerce is a growing influence
2. The growing popularity of eCommerce is leading to increased needs for distribution facilities. Now known as “fulfillment centers”, these assets typically feature high ceilings and energy efficiency. They continue to be in high demand. The supply chain network is a critical component of the eCommerce world.
3. The shift in consumer patterns, read “on-line shopping”, is affecting commercial real estate in a manner benefiting industrial real estate investment. Without the need for a traditional retail storefronts, some retailers are finding it tough to generate sales sufficient to pay retail rents and turn a profit. Industrial real estate is in demand from retailers who still need a physical presence in major markets, for distribution purposes.
4. New office work patterns are emerging. In particular, younger workers are seeing value in abandoning traditional office space. They are seeking a more collaborative and creative open space environment. Many industrial buildings suit this shift perfectly. In particular older buildings in urban areas. With their exposed ceilings, brick walls, and suspended air ducts, they offer an attractive work environment. Wide open spaces industrial spaces foster the collegiality and creativity many business seek to create.
5. Industrial spaces, by virtue of their “simple” design and construction, often lend themselves to a wide variety of uses. In short, its flexible space, adaptable to any number of purposes. It is typically cheaper to build, and less costly to retro-fit. It can also be less expensive to manage and operate. Industrial land is often less expensive to buy.
6. Demand for industrial space also benefits from GDP growth. As the value of the loonie drops, our exports and manufactured goods become more competitive. Consequently demand for distribution space increases.
Returns outperform the market
7. REITS have been busy acquiring industrial assets. Their natural focus is on financial performance and unit holder returns. A strong portfolio focus has led to enhanced tenant quality and income. Industrial property REITS in the US, have lead all property classes in YTD returns.
How does this translate into lender interest and funding availability?
In the recently released CBRE 2016 Canadian Real Estate Lenders’ Report, the 2017 budget intentions for all major active lenders was surveyed. The lenders identified industrial real estate as the asset class to see increased funding allocations. Fully 45% of lenders indicated planned increases in industrial funding. Compare that to office property, which was identified by only 24% of lenders as a class which will see increased lending activity.
Considering a jump into industrial real estate? Expect to see a smile on your lenders’ face!