Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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COMMERCIAL INVESTMENT REAL ESTATE 28 September | October 2017 Zoning and land costs are two potential stum- bling blocks. However, there are cases where those conversions are moving forward success- fully. For example, a shuttered Kmart was demol- ished in Cincinnati and replaced by a build-to- suit industrial building for a local supplier to the trucking industry. In Cleveland, an Atlanta-based developer is looking at a vacant regional mall site on which to construct a 600,000- to 700,000-sf distribu- tion facility for an undisclosed national company, DeFilippo notes. Infill locations are attractive due to the high demand and barriers to entry for new competition. Historically, very few people worked in industrial warehouse facilities. Today, many individuals oper- ate in these fulfillment and distribution centers, and they want to work in facilities that are close to ame- nities and are not parked out in a greenfield in the middle of nowhere. "The employers, including Amazon, are going to look at space much the way an office employer does," says Scott Crowe, chief investment strategist and portfolio manager at CenterSquare Investment Management in New York City. "How is this space going to help me attract employees, hire people, and keep them happy?" For example, CenterSquare recently acquired a former Quaker Oats facility just outside of Harrisburg, Pa. The Class A industrial mar- ket is situated on all of the major road arter- ies, which make it very easy to reach the entire northeast within a one-day drive, Crowe notes. CenterSquare plans to completely gut the facility and raise ceiling heights. "The way to avoid competition is to add value by accessing assets that need some form of transforma- tion, active management, and capital investment," Crowe says. Although the pace of growth may be slowing, it appears that the stage is set for more expansion ahead, with developers, investors, and space users all remaining relatively active. "I think we are years away from the end of the cycle," Crowe adds. "And I think we are going to be surprised about how long the cycle lasts, because it has been a very muted recovery, and risk aversion due to the global financial crisis has forced a lot of discipline into markets in general, including com- mercial real estate." Beth Mattson-Teig is a business writer based in Minneapolis. Investors Strongly Support Industrial Assets by Beth Mattson-Teig Data that shows a decline in industrial property sales may not be an accurate barometer for the still-strong demand that exists in the mar- ketplace. After reaching a high of $78.3 billion in sales in 2015, sales dropped to $60 billion in 2016, and appear to have slowed further this year with year-to-date sales through May at $22.5 billion, according to Real Capital Analytics. However, the 2015 sales volume was boosted by a few large portfo- lio deals. There weren't as many of those portfolio sales in 2016, which makes it appear — artificially — that demand has dropped off, accord- ing to Ryan Severino, chief economist at JLL . In 2015, 45 percent of sales were fueled by large-scale transactions greater than $150 million as compared to 15 percent in 2016, according to JLL . "There is still a lot of money that is interested in industrial, particu- larly in individual deals," Severino says. Investors like the fundamentals, and the forecast is for strong occupancies and rent growth to continue, even if there are some signs of slowing. Also, buyer demand is broad-based — coming from institutional and international capital — as well as owner-occupants and value-add investors that are looking to acquire and upgrade older assets. Although single-asset deals represent the bulk of sales so far this year, some bigger portfolio deals have transpired. Recent notable sales included TA Realty's sale of a 45-property portfolio of office and industrial properties for a reported $854.5 million. The Hampshire Companies also sold a 1.2-msf, six-building portfolio in New Jersey for $146.9 million. Despite concerns about rising interest rates, investors are still willing to pay top dollar for industrial properties. Cap rates held firm at 6.8 percent in 2015 and 2016. Rates have inched nominally higher to 6.9 percent in 2017. However, price per square foot has been climbing since 2011. Year-to-date sale prices through May were averaging $83 psf compared to $79 in 2016, according to Real Capital Analytics. Cap rates are getting close to the peak, but some industry ex- perts believe there is still room for compression in many markets nationwide. "Quality industrial assets are trading at increasing price levels," says Loren M. DeFilippo, CCIM, director of research | Ohio for Colliers In- ternational in Cincinnati. Pricing also is motivating investors to expand strategies to consider new geographic markets. As markets move closer to the peak, it is typical for investors on both the East and West Coasts to start looking in the Midwest and smaller secondary and tertiary markets where cap rates are higher, according to DeFilippo. That has certainly been the case in Cincinnati and Columbus, Ohio. "There are a lot of quality assets here and a lot of interest from investors," he adds.