While the industrial sector may be softening, there are still plenty of signs of momentum to be found in certain areas, according to Green Street’s latest industrial sector update.
First the bad news: Overall transactions plummeted by 40% year-over-year in Q1 due to persistently wide bid-ask spreads and decreased availability and higher cost of debt financing, especially for larger-check-size portfolio deals.
On the flip side, though, report authors Vince Tibone and Jessica Zheng point to cold storage demand, rising NOI forecasts and cash-releasing spreads — especially at Prologis — and Houston and East Coast port activity.
What To Like
Cold storage firm Americold raised 2023 SP-NOI guidance by a whopping 800 bps based on record Q1 occupancy and GreenStreet said cold storage will see massive same-store NOI spikes as It also raised full-year occupancy estimates by over 200 bps as it has obtained more fixed-commitment contracts.
Cash releasing spreads, which measure the change in rent per square foot between new and expiring leases, reached record levels at many industrial REITs during Q1 “and should continue to grow over the next three years as expiring leases continue to capture the remarkable market rent growth from 2021 and 2022,” according to the report.
This year, cash-releasing spreads are expected to be unchanged, but GreenStreet expects them to rise significantly in 2024. Prologis is indicating the cash mark to market on the 2024 lease roll to be 70% to 75%, well above GreenStreet’s previous forecast of 56%.
Furthermore, near-term same-property NOI growth forecasts are increased by 80 bps per annum on average through 2025, due to higher market rent growth and releasing spread estimates. Once again, it’s Prologis, which received a more substantial boost in 2024 and 2025.
Coastal markets should see more favorable market rent growth prospects, driven by the structural imbalance in supply and demand. GreenStreet gave Miami and Atlanta the most significant positive revisions. SoCal’s near-term forecasts were lowered marginally as seaport volumes have been giving way to Houston and East Coast ports.
“They are capturing market share from the West Coast and should this shift continue, the loss of market share could pose concerns to SoCal industrial fundamentals,” according to the report.
CNBC reported Monday that in emails it obtained, the Long Beach, Calif., port would close on Monday due to stalled union contract negotiations. The Oakland port closed Friday over similar disputes.
Overall, import container volumes continued to plummet in Q1, diminishing nearly a third, year-over-year, to fall slightly below pre-pandemic levels, the report showed.
What Is Softening
Goods consumption is softening as retail sales excluding auto, gas, and restaurants dipped marginally in March and April, a trend supported by inventories in seaport volumes and warehouse demand. E-Commerce growth outpaced bricks and mortar in Q1.
Retail inventories rose in Q1 and are about 2 percent below where they were in 2019, as compared to 6% below in the prior quarter. Walmart and Target reduced their inventories that built up excess during the pandemic’s supply chain disruptions.
“Retailers are expected to adopt a cautious approach toward inventory management for the remainder of the year, particularly on discretionary items,” according to the authors.
Net absorption in Q1 was lower than expected and some are taking a more cautious approach to leasing.
Pricing Power Coming To Landlords
Supply is now expected to exceed demand by 150 million square feet in 2023. Occupancy fell to 96%, which is still well above short-and long-term averages.
“In the out years, demand and supply are forecasted to be mostly aligned at 2% of total stock per annum, which should allow for sustained landlord pricing power in a low vacancy environment,” according to the report.
GreenStreet’s M-Rev-PAF growth (the combination of changes in market rents and occupancy) estimate for 2023 is unchanged at 7%, factoring in solid market rent growth in Q1 of 3% and the expectation of a modest economic contraction in the second half of the year. Forecasts for 2024-2026 are increased by 500bps, cumulatively, due to lower supply expectations.