Industrial commercial real estate list is primed for gains

Class-B industrial properties have become attractive to investors as rents are projected to rise.

Industrial properties are joining the prodigious ranks of multifamily and health care properties as tight inventory levels are leading to higher rent yield projections.

According to data from a DLA Piper survey reported by the National Real Estate Investor, the industrial sector has added a paltry 60 million square feet of assets since 2008. That figure is is almost 200 million square feet shy of the sector's 20-year average. The restricted expansion of industrial property nationwide has stirred up interest from investors as projections for the U.S. economy show promise.

"Industrial is the best portfolio investment today because of its low intensive management needs and few capital costs compared to other property types," Josh McArtor, of CBRE, told NREI. "Where at an office you might be spending $50 per square foot just to release vacant space, [with] industrial you've got concrete block and maybe some air conditioning costs. You've got institutional and REITs buying at five-six cap rates, projecting they can roll up 100 to 200 basis points."

McArtor noted the lack of new industrial property entering the market nearly guarantees a rise in rent over the next year, yield that investors gravitate toward. He says the economy was not adequately performing during the recession for portfolios to be monetized by commercial real estate companies. With a recent 50 basis point drop in market availability, the sector is bound to heat up, according to NREI.

Vacancy rates and rents support industrial sector growth
As outlined in the National Association of Realtors quarterly commercial real estate forecast, McArtor's sentiments are supported by the numbers.

"Overall commercial real estate leasing activity continued to grow in most markets during the closing months of 2012, which is modestly lowering vacancy rates in all of the commercial sectors early this year," said Lawrence Yun, chief economist at NAR. "Business spending is expected to rise faster in 2013 because of record high corporate profits. Low interest rates also are permitting companies to improve their balance sheets."

The report also cites a drop in industrial vacancy rates. With a decline expected through 2014 from 9.4 percent to 8.9 percent, annual rents are projected to go up by 5 percent by 2014.

As most class-A properties are already absorbed, there has been an explosion in demand for versatile class-B property, according to Erik Foster, national practice leader for Avison Young's Capital Markets, according to NREI.

"True, class-B portfolios tend to be smaller and more regional," said Foster. "But class-A properties have become so expensive many buyers yield requirements won't allow them to go to those levels."

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