Fundamentals for industrial are still solid despite some cap rate expansion

Our updated outlook for industrial real estate.

Often considered the darling of the commercial real estate market, the industrial sector is still under-supplied and in high demand, but the frenzy for industrial space is starting to fade on the heels of a slow-down in e-commerce sales. By no means is e-commerce growth coming to a halt. According to a forecast by Morgan Stanley, e-commerce sales in the U.S. could reach 31% of total sales by 2026, up 23% from 2022, indicating a permanent change in behavior and a lasting consumer preference towards online shopping.

 

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**.

*Green Street Advisors - Industrial Sector Update: Still “Prime” Real Estate, 2022.
**Green Street Advisors - Cap Rate Observer, Nov 2022

 

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.

*Green Street Advisors - Industrial Sector Update: Still “Prime” Real Estate, 2022.

 

This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. The information contained herein or presented herewith is not a recommendation of, or solicitation for, the subscription, purchase or sale of any security or offering, including but not limited to any offering which may invest in the geographic area(s) or asset type(s) mentioned herein, whether or not such offering is posted on the CrowdStreet Marketplace. Though CrowdStreet believes the information contained and compiled herein has been obtained from sources believed to be reliable, CrowdStreet makes no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the subject thereof. All projections, forecasts, and estimates of returns or future performance, and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. Investment opportunities on the CrowdStreet Marketplace are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Understanding the trade-off between risk and reward can help you evaluate strategies to pursue your financial objectives. 

Related content >

All information provided through the education center is for educational purposes only and does not constitute investment, legal, or tax advice, or an offer to buy or sell any security or investment product. The information contained herein has been obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. The articles in this education center are written by employees of CrowdStreet and have been prepared solely for informational purposes. Any videos presented are for educational purposes only and do not constitute investment advice. Whenever there are hyperlinks to third-party content, this information is intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals or points of view outside of Crowdstreet. All examples are hypothetical and for illustrative purposes only.