Despite uncertainty at the national policy level, investor enthusiasm for commercial real estate — industrial in particular — has remained mostly solid, as seen in record attendance at this week's IMN annual Winter Forum on Real Estate Opportunity and Private Fund Investing in Laguna Beach, Calif.
While attendee assessments of the health of different property types varied — retail is still bloated and outmoded in places; office is generally healthy in the coastal "global innovation markets” but dodgy on the fringes — attendees were universally positive about industrial real estate, a primary beneficiary of e-commerce's growth.
More than 1,100 attended IMN's annual Winter Forum this week in Laguna Beach, Calif. — a record showing.
Source: S&P Global Market Intelligence
Still, Peter Muoio, chief economist at the online real estate platform Ten-X LLC, described a lumpy transaction market on the national level, even with fundamentals “incredibly strong” and demand robust.
"Fundamentals are strong, and you'd think ... the volume would be stronger, but people are worried about what might happen if the trade war situation were really to get worse," Muoio told S&P Global Market Intelligence.
Muoio said investors have moved to the sidelines in droves and are waiting for more stable conditions, with fewer curveballs at the national policy level and on the international stage, to transact.
"Anytime there's uncertainty, you step back and wait," he said.
Sean Dalfen, president and chief investment officer at Dalfen Industrial, a real estate investment manager that specializes in industrial property, attributed slower-than-expected industrial transaction flow in part to the scarcity of portfolios for sale. Most institutional buyers only want to buy in bulk, he said.
"The pricing we’ve often seen … from one quarter to another, often has to do with what portfolios are on the market at the time," Dalfen said. "It is very hard to write a check for a large amount [of industrial property] unless it’s a large portfolio. And if there are not large portfolios out there, there is not much trading."
There are reportedly less-lumpy areas. Kevin Shannon, co-head of U.S. capital markets at Newmark Knight Frank, said deal flow on the West Coast has continued unabated in recent months. A Boeing Co. site in the Seattle area recently received more than 20 offers, he said. Southern California vacancy rates are in the range of 1% to 3% — levels he called "ridiculous." Rent continues to grow in some markets at double-digit rates, and capitalization rates, which reflect property value, are as low as 3.5% in markets such as San Diego and Orange County in California.
"Rent growth and the fundamentals on the West Coast for industrial are unbelievable," he said.
Shannon attributed industrial’s recent run in part to its lower tenant improvement costs, which have made it even more attractive to prospective buyers late in the real estate cycle. He said some big institutional buyers, such as Brookfield Asset Management Inc. which has an affinity for "mega-deals," have chased $10 million deals in West Coast markets because "they have no other way to feed the pipeline."
Sean Armstrong, principal and portfolio manager at Westport Capital Partners LLC, said investors can expect industrial fundamentals to maintain a level of health even if broader economic conditions weaken.
"The hottest part of the market is the stuff with the highest clear heights, cross-dock facilities, the kind of thing that you can get a high degree of efficiency out of — that’s product that has the highest demand," Armstrong said. "[Industrial] will certainly see the strongest pricing, even if we do see some kind of a softening."