Monday Morning Scoop - What's Behind Q3's Industrial Investment Sales Slowdown
What’s Behind Q3’s Industrial Investment Sales Slowdown
Investment sales volume declined in the white-hot industrial sector in Q3, following five quarters of robust growth, pointing to the “acute reality” of the current economic situation, according to Avison Young’s Erik Foster.
“The recent rapid boost in interest rates is prompting many investors and lenders to pull back from commercial real estate and re-evaluate their market positioning, underwriting projections and tolerance for near-term risk,” Foster says. “While other market sectors have seen more significant sales declines, the industrial sector is now seeing its first recent sales decline, following five quarters of year-over-year increases ranging from 15% to 166%. In Q3 2022, industrial sales declined by 30.7%, a sign that investors are retrenching to re-examine their go-forward strategies amidst significant economic volatility.”
Meanwhile, however, leasing fundamentals remain strong, with vacancies hovering at historically low levels in many markets and rents continuing to push up. And while capital costs have increased, Foster says the slowdown in industrial sales should be brief.
“Positive industrial asset fundamentals continue to benefit owners, therefore, as lending liquidly becomes more prevalent in the coming months, we believe that investors (and sellers) will learn to comply with the new realities of the price of the debt as transaction volumes increase in the future,” he says.
Real Capital Analytics research from Q3 shows that US industrial sales declined by nearly 31% year over year to hit $23 billion, with an average price-per-square-foot of $132 and an average cap rate of 5.4%, up 11 basis points year-over-year, but still lower than prior to the pandemic. But data thus far for Q4 shows that sales volume is currently about 65% of Q3′s total, “a sign that fourth quarter sales may rebound and finish ahead of the prior period,” Foster says. Cap rates are edging up to 5.5%.
Debt financing is showing signs of strains, as rapid rate increases by the Federal Reserve have prompted some large lenders to pull back on CRE lending. That in turn is pushing companies to seek alternative financing options like using fixed-rate debt or hedging variable debt, according to Avison Young.
By: Lynn Pollack