U.S. industrial investment is expected to continue at a steady pace into 2020, although headwinds created by tariffs and a slowing economy are beginning to gain steam, according to a new RCM-SIOR Industrial Investor Sentiment Report.

The RCM-SIOR Report aggregates insights and perspectives from industrial market experts—investors, developers and brokers— from across the country. Feedback from Society of Industrial and Office Realtors® (SIOR), is particularly valuable, as SIORs are the most knowledgeable commercial real estate brokers in the industry and have a unique and detailed perspective into the current challenges and opportunities facing the U.S. industrial sector.

“We definitely find ourselves at a very interesting point. As we look ahead and evaluate a softening in the market, we can still expect strong demand to continue for the foreseeable future,” says outgoing SIOR Global President Robert G. Thornburgh, SIOR, CCIM, a Regional President for Kidder Matthews, based in the company’s El Segundo, CA office. “Further down the road, the corresponding rise in values, construction, labor and talks of a recession – while not new topics – could clearly develop into sizeable headwinds.”

Key survey responses

The RCM-SIOR report was based on surveys and interviews that tracked participants’ perceptions of investment activity, pricing, perceived threats and opportunities, and cap rates. Overall, responses underscore the sentiment that the market remains on solid footing, even if there is a slight tempering of enthusiasm. Among the findings are:

• Investment Activity—E-commerce continues to reign as the top growth factor noted by survey respondents. 44% noted growth in e-commerce while 24% noted the amount of capital waiting to be placed in the market.
• Industrial Pricing—25% of respondents said pricing will increase by 5 percent or more over the next 12 to 18 months, down from 38% in 2018 and 34% in 2017. In the 2019 survey, 35% said pricing will increase by less than 5%, while 34% said pricing will stay the same.
• Cap Rates— Nearly 32% of participants in the RCM-SIOR report expect cap rates to compress further over the next 12 to 18 months. Since 2015, national average cap rates have compressed from 6.8% to a current level of 6.3%, according to data from Real Capital Analytics (RCA). Those rates are down to 4% to 5% in key markets, however, according to report participants.

  Markets to Watch in 2020

• Heading toward 2020, many investors surveyed and interviewed for this report said that industrial activity will continue to be strong in core markets, such as the Inland Empire, Dallas, Chicago, and Northern New Jersey. Coastal markets, particularly those that tie into port activity, such as Los Angeles and Miami, are also expected to perform well due to the limited potential for further development.
• States with reasonable regulatory oversight and legislation, such as Arizona, Nevada, Texas, Florida and Tennessee, also are viewed favorably.
• In summing up the global influence of e-commerce and need to evaluate each market’s characteristics, says incoming SIOR Global President Mark J. Duclos, SIOR, CRE, President of Sentry Commercial, says “E-commerce has brought a globalized focus to this sector, and may be a constant thread across the country, but the majority of markets also are driven by the local market users’ needs and economic considerations.”

E-commerce growth is key sustaining factor for the industrial sector

E-commerce, which is projected to grow by 10% per year, continues to be a transformational force in the industrial sector. While there is considerable activity from more traditional manufacturing, packaging, and related tenants, the buzz that e-commerce creates is difficult to overlook.

Construction still active and driving investment pipeline

In this year’s report, 51% of the survey respondents noted being somewhat concerned about overbuilding, compared with 33% saying they were not concerned at all. Some report respondents noted the continued need for new development in some markets, however, given the low vacancy rates and strong tenant demand.

Economic and non-economic concerns posing threats

The report also notes that brokers and investors are concerned about tariffs and escalating trade wars, which they say cause volatility and increased costs. Closer to home, experts say the ongoing labor shortage—both for workers in general and for those with specific manufacturing, computer and related skills—is having ripple effects throughout the U.S.

According to the report, the greatest non-economic threat to the industrial market is equally balanced between lack of supply of quality assets and unrealistic seller expectations and, to a lesser degree, overbuilding or oversupply. The RCM-SIOR survey also cites lack of supply as a concern. Apprehension about unrealistic seller expectations has risen, as sales activity has continued at a steady pace.

To download a copy of the 2019 RCM-SIOR Industrial Investor Sentiment Report, click click here..