Investors in North America continue to see industrial assets as a "top opportunity" in 2019 amid all-time low vacancy rates, all-time high rents and a bullish long-term outlook for the sector, according to a report from Marcus & Millichap Inc.
The report identified urban infill properties as a chief target among investors, noting that the rise of e-commerce and the need for strengthened last-mile logistics will be a main factor backing demand for urban industrial space.
Robust net operating income growth is expected to be a key focus among investors in 2019, driven by sizable rent increases across most markets. Prospects of an increasing-interest-rate environment could also be a critical factor affecting investor decisions, though pressures appear to be eased for now.
Additionally, as a result of the tax reform, companies that own their buildings could weigh sale-leaseback strategies to maximize their tax benefits.
According to the report, the industrial property market saw an abundance of equity capital in 2018, fueling investor competition and putting upward pressure on asset values. Strong competition among buyers and the opportunity for higher yields are encouraging institutional and private groups to enter secondary and tertiary markets.
Amid higher returns in the industrial property sector, investors are prompted to place a premium on class A and class B assets over replacement costs. That said, a strong construction pipeline could result in sellers being more competitive with pricing in 2019. The report also projected an increase in adaptive reuse of outdated properties in 2019, as e-commerce drives demand for logistics space.
Port markets on the U.S. West Coast, in the Southeast and in New Jersey are likely to drive deal volume, while investment activity for data centers is projected to stay aggressive, as the likes of Microsoft, Google LLC and Amazon expand their server farms, increasing liquidity in key markets such as Northern Virginia, Dallas, Chicago, New York and Northern California.
Citing the 2019 National Industrial Property Index, the report said the Southern California markets dominate the top 10 in the index, with Los Angeles keeping the top spot, thanks in part to it achieving the lowest vacancy rate among metros in the index. Milwaukee recorded the most notable improvement in the index, jumping six spots.
The index ranks 32 major industrial markets based on a series of 12-month, forward-looking economic and supply-and-demand variables.
"The positive momentum supporting industrial assets bodes well for investors, but unanticipated challenges could certainly emerge in the coming year given the global economic and political climate," the report said.