Investors seeking higher cap rates are finding them in industrial spaces that serve manufacturing, according to a new report from CBRE.
Although e-commerce-fueled bulk logistics space is the darling of the current cycle, manufacturing stimulates industrial space demand for both factories and warehouses.
CBRE pointed to Austin, Phoenix, and Reno as areas that benefit from new factories and capital stock capable of building high-value goods.
“Interestingly, high-cost California has expanded its manufacturing as it retains a competitive edge in producing aerospace, chemicals, computing equipment, and other extremely high-value goods,” according to its report.
Los Angeles is a notable outlier, it said, reflecting its heavy exposure to lower-value sectors, such as garment making. The Midwest accounts for just over one-third of U.S. manufacturing employment, just ahead of the South.
Manufacturing Tenants More Imbedded in the Property
Rob Gemerchak, vice president, investment sales, Northmarq, tells GlobeSt.com that net-leased industrial manufacturing properties remain a very popular asset class among experienced investors – particularly those whose underwriting considers the tenant’s use of the facility, their industry, the property’s infrastructure, and regional labor.
“As opposed to some other asset classes, manufacturing tenants tend to be more embedded in the property due to their investment in process machinery and equipment, production lines, and use of a trained workforce,” Gemerchak said. “A successful manufacturing tenant is often more likely to renew a lease vs. relocate – due to the time, expense, and production challenges involved in a relocation.”
Considering manufacturing facilities’ unique infrastructure that may include cranes, heavy power, reinforced floors, etc. – there is economic value in these systems which support and enhance the real estate investment, he said.
“The tenant’s industry is also a factor that investors consider, as firms who are supplying growth industries such as computer and electronics, chemicals, pharmaceuticals, and automotive provide the strongest security,” according to Gemerchak. “Finally, the regional workforce that supplies the tenant’s operation is an important variable that investors consider. As onshoring and reshoring of the manufacturing base continue, industrial properties located in strong regional labor markets will continue to be considered very attractive as a long-term investment.”
Economic Turbulence Might Have Inflated Cap Rates
Shanti Ryle, CREXi senior content marketing manager, tells GlobeSt.com that overall, while the total sales comps for manufacturing buildings are trending down year-over-year (given overall pauses in activity due to rising interest rate/economic factors), valuations and transaction volume for manufacturing industrial properties are still on the rise.
“There may be some pause in transaction velocity following pandemic-era construction delays and economic turbulence, and the delivery of multiple properties at the same time may have inflated cap rates, lowering total sales value in 2022,” Ryle said.
Arizona, Texas, I-85 Corridor Ideal for Manufacturing Expansion
Adrian Ponsen, national director of U.S. industrial analytics at CoStar Group, tells GlobeSt.com that labor shortages have been gripping most sectors of the U.S. economy since 2019, but because of an aging workforce, and a prevailing skills gap, manufacturing is one of the industries struggling most to grow and retain its headcount.
“As a result, US regions doing best to attract both foreign and domestic in-migration including Arizona, Texas, and the I-85 corridor stretching through Georgia and the Carolinas, have had a huge leg up securing the largest manufacturing expansions in recent years, particularly those tied to electric vehicle and semiconductor assembly,” Ponsen said. “These are the locations where manufacturers feel most confident that local labor force growth will be strong enough to support staffing up new operations at scale.”