The current market shift is also affecting cap rates, which had 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 clear that the industrial sector must soon experience cap rate expansion. Since then, industrial cap rates have expanded nationally and accordingly, asset prices are decreasing, but it is fair to say that valuations have been buoyed thus far by better-than-expected NOI growth**.
Industrial has long been a popular asset class among institutional investors due to its relatively stable performance. Industrial assets just haven't been subject to the same high’s and low’s in terms of price swings as compared to other asset classes . Lenders are generally eager to hold “safe” assets in their portfolio loans, which is why logistics real estate tends to take up a large amount of debt capital. But in today’s market climate, the value proposition has diminished slightly for industrial, which affects stabilized deals first and foremost.
Considering that the long-term trends for industrial projects are still in place, we continue to believe in adding new supply for industrial, especially in tight markets, as long as we budget exit values that reflect the current expanding cap rate environment.
Overall, the outlook for the sector remains relatively unchanged* from its highs and will remain elevated and sought after, especially in low-vacancy and high-barrier markets. We’ve recently updated our Investment Thesis, including our outlook for industrial. To read in further detail, please access here.
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