Mixed Indicators Point to Right-Sizing Warehouse Investment Strategy
June 14, 2012 Leave a comment
How Changing Market Conditions Affect the Competitive Landscape
By Mark Heschmeyer
Leading indicators of warehouse demand have been mixed this spring and appear to be on shaky ground. Nonetheless, they still appear to be pointing in the right direction.
“On the bright side, companies continue to book record-breaking profits,” Ki Bin Kim, analyst for Macquarie Capital (USA) Inc. wrote in a recent report. “However, retained earnings have not been used to expand or reinvest into businesses, in a significant manner.”
Since the fourth quarter of 2008, corporate profits are up 105% but business spending on fixed investments that has remained flat at 0.5%, Kim reported. Also, the slowing growth rate of corporate profits isn’t helping the situation.
“Combined with no new net supply [sometimes even negative supply, according to CoStar Group] and continued gains in e-commerce that require additional distribution centers, we expect U.S. industrial absorption to improve by 200 basis points (bps) by the end of 2013,” Kim reported. “This implies that the national occupancy rate improves to 93.2% from 91% today, all else equal.”
“This is one of the primary reasons we remain bullish on industrial,” Kim said.
Shaw Lupton, senior real estate economist for CoStar Group, said that based on current conditions, the warehouse market is ripe for value-add and opportunistic investment strategies.
“Whether the inclination is to acquire and rehab undercapitalized/underleased multitenant properties, buy land parcels with development potential, or construct ginormous boxes, it’s important for investors to understand how changing market conditions affect the competitive landscape differently across warehouse markets and tenant profiles,” Lupton said. “Knowing this can mean the difference between pulling the trigger on a right-sized building for the market or diving headfirst into an investment bloodbath.”
Most markets have seen big box space blocks of at least 500,000 square feet soaked up rapidly in recent quarters, Lupton said.
“Less talked about is that in most markets, occupancy has significantly improved in locally oriented product within space blocks under 50,000 square feet,” he added.
“But buyer beware — not everyone is having a party. Regional space is still struggling in most markets – the 100,000-square-foot to 250,000-square-foot blocks remain a lot closer to recession highs than prerecession bottoms,” Lupton said.
Phoenix is a prime example. The market as a whole is seeing occupancy improve by leaps and bounds, but the number of vacant blocks for midsized buildings is at a 6-year peak.
The Inland Empire looks to be one of the better markets; it has about half the number of vacant blocks in the 100,000-square-foot to 250,000-square-foot range as at its prerecessionary peak, but these blocks are still at two-thirds of their cyclical high.
Chicago is also starting to make progress, but like most markets, it has a long way to go before reaching equilibrium, Lupton said.
There will certainly be opportunities in the midrange of the market as fundamentals continue to firm up. But investors may want to build more downtime and rent concessions into their underwriting of regionally oriented product in places like these and in other pockets of the U.S. market where fundamentals remain relatively soft, Lupton said.
Read entire CoStar article here.