Chapter 01: Major Asset Classes

Section 02: Industrial


Often considered the darling of the commercial real estate market, the industrial sector is generally under-supplied and in high demand, despite the uncertainty in the overall market. The frenzy for industrial space however is starting to fade as the rate of growth in e-commerce sales is down. However, Morgan Stanley reported that e-commerce sales in the U.S. could reach 31% of total sales by 2026, up from 14.7% in 2022, indicating a change in behavior and a lasting consumer preference toward online shopping.

Figure 5: Industrial Market Fundamentals by Year with ForecastFigure-5
Source: Industrial, United States, CoStar Data, as of May 2023. 

Green Street stated that the industrial sector has a “solid outlook” over the next few years and that the “defending champion” broke its 2021 record for revenue growth in 2022, posting a strong outlook for the year ahead after coming off of strong NOI growth—this growth was due in part to a continued expectation of e-commerce sales paired with rent growth in the last two years (with national market rents growing over 40% cumulatively, exceeding that of the previous seven years combined.)10

Green Street data also shows that as with some other asset classes, the current market shift is pushing up cap rates, which compressed to record levels for the industrial sector, reaching as low as 3.5% in early 2022. As soon as interest rates began to rise to the level that industrial cap rates would intersect with the yield on the 10-year treasury (which is also known as the “risk free” rate), it became likely that the industrial sector would soon experience cap rate expansion. Since then, industrial cap rates expanded by over 90 basis points in 2022, according to Green Street, and consistently, asset prices declined.10

We also anticipate the "friend-shoring" trend taking hold - moving industrial production to the shores of political allies - maybe bring more manufacturing to Mexico. If it continues, it may create increased demand for new distribution space in markets like Texas.

With demand still strong however, prices for industrial properties have increased by 2.5% in Q1 of 2023 after declining by 15% annually in 2022 - the only CRE asset class for which prices increased in 2023.11 It is important to note that price declines in 2022 were a reversion to the mean from its peak pricing in 2021, when industrial assets had appreciated by record-levels, according to Green Street, following the pandemic. Despite these price declines, we believe industrial values are far from a bargain when put into the context of the sector’s long-term historical trendline.

The outlook for rent growth is expected to remain above long-term historical trends, according to Green Street, although some deceleration is expected from its growth within the last two years. Overall, Green Street predicts the outlook for the industrial sector remains positive, and it will likely remain a sought after asset class over the next few years, especially in low vacancy and high-barrier markets.


Considering that long-term trends such as undersupply, low vacancies, and high demand for industrial projects are still in place, we continue to believe in adding new supply for industrial projects located in growth markets. Primary markets with strong industrial demand are highly competitive and, as such, we are seeing increased demand in secondary and tertiary markets with burgeoning institutional presence. 

We also anticipate that the “friend-shoring” trend that is taking hold, which means  moving industrial production to the shores of political allies, may bring more manufacturing to neighboring Mexico, which if it continues may bring increased demand for new distribution space in markets like Texas. 

We are also favoring acquisition opportunities as they are making more sense in today’s expanding cap rate environment—a strategy that has not been viable, in our estimation, since 2020. Therefore, the yield on cost, which is calculated by dividing a property's annual net operating income (NOI) by its total project cost, has generally been higher today on average than we have observed in the past few years. With that in mind, we are favoring opportunities to acquire assets, especially in tight markets with strong pre-leasing activity, as long as we budget exit values that reflect the current expanding cap rate environment.

We continue to believe in adding new supply for industrial projects located in growth markets.
Industrial Real Estate Market Outlook

As with other property types, lenders are typically requiring an increase in interest reserves on ground up development projects, which is adding to the total project costs. Industrial projects do, however, typically require lower interest reserves due to their usually less complicated build-outs. They generally offer potentially shorter construction and stabilization timelines, compared to multifamily and hospitality properties. 

Industrial properties also generally have less operational risk due to the Triple Net (NNN) nature of leases, where tenants are responsible for paying all operating expenses including property taxes and insurance. Because operating costs are passed on to the tenant, NNN lease structures can help insulate industrial properties from operating expense exposure, to a degree, as operational costs go up. However, the flip side is that predetermined contractual rent escalations (typically set at 3% per annum) may not be as attractive as they were pre-pandemic due to inflation, which is also part of the reason behind the current cap rate expansion.

10 “Industrial Sector Update: Still Flexing Rent Growth Muscles,” Green Street, 2023.
11 Commercial Property Price Index, Green Street, May 2023.

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