Industrial Sector Shines In The Latest Outlook For Commercial Real Estate Market - Miami Airport Warehouses

New sources of demand make the industrial segment the star of commercial real estate, according to Peter Muoio, ‎chief economist and head of research at Ten-X Commercial, the nation’s leading online real estate marketplace.

The drivers for industrial space include e-retail fulfillment and distribution, cloud computing and the proliferation of legalized marijuana.

“From the demand side, the industrial space is firing on all cylinders,” said Muoio.

The country’s current economic expansion is now one of the longest in history and economists are pondering just how much longer it will last. Given the length of the cycle, Muoio’s research team at Ten-X Commercial is looking at a scenario with a commercial real estate downturn in 2019 and 2020. In the event of a cyclical downturn in those years, the vacancy rate in the industrial sector in 2019 is projected to increase to the mid-7 percent range, but that’s well below the 8 percent to 9 percent ranges of the previous economic cycles, according to Ten-X’s Fall 2017 Industrial Market Outlook.

New sources of demand plus extremely low vacancy rates equals a sector that’s more resilient to a cyclical downturn than others.

“This makes this segment stand out compared to, for example, retail and office, where vacancies have come down very modestly from their recessionary levels and are way above rates late in the previous cycle,” Muoio said. “The strength of the industrial space is well poised for any kind of turmoil that might hit. Even when we factor in a decline in demand, we don’t envision vacancies going as high as they have over the previous two downturns.”

The industrial sector is capturing investors’ attention.

“If you look back at previous cycles, you could call the industrial sector the sleepy one. Not as many investors were involved in the industrial sector,” Muoio said. “But this ‘new’ industrial sector and the fact that it’s doing so well has increased investor interest.”

Ten-X Research found that deal volume in the industrial market rose 14 percent to $15.8 billion in the second quarter of 2017. Pricing in the sector hit an all-time high $80 per square foot in Q2 and industrial cap rates fell 30 basis points to 5.6 percent.

How Trump’s Policies May Impact Industrial Market

Muoio and his team at Ten-X Commercial are watching how policies enacted by the Trump administration may disrupt trade and the industrial real estate market.

The U.S. withdrew from the Trans-Pacific Partnership as one of Trump’s first acts as president, and the administration is now considering imposing tariffs and changing the rules of NAFTA (North American Free Trade Agreement).  Any policies that discourage trade are potential negatives for the industrial segment, especially for coastal markets that handle much of the trade, according to Muoio. However, positive economic news out of Europe provides optimism to counterbalance Trump’s trade policies.

“It’s a slow gain there, but European economies are showing some signs of momentum and that will be a positive in terms of generating more trade with the U.S.,” Muoio said.