CORFAC News

Buyers and non-institutional capital seeking out industrial real estate investments are being met with intense competition. The high cost of financing has created challenges for closing real estate deals. The most attractive properties are those with assumable loans at low interest rates, or sellers who can provide their own financing to the buyers. Those opportunities are rare – and get snapped up quickly. 
 
In many markets, private equity firms have been purchasing large portfolios of high-end industrial real estate. For family offices and upstart private equity funds, competing with institutional capital can mean looking in less familiar places. Class B and C industrial properties offer the opportunity to modernize and up-lease to command market-rate rates.

Which U.S. Markets are Industrial Powerhouses – And Which are Coming Up

The largest U.S. industrial markets rose to dominance based on a combination of economic growth, strategic location to population center, and transportation connectivity including seaports, rail, and interstate highways. Demographic trends have proven to be sustainable long term, and these trends can be used to forecast with a high level of certainty where growth will occur in the future.  

David Boyd, Managing Principal with Boyd Commercial/CORFAC International in Houston and 2024 president of CORFAC International, explained, “As with most commercial property asset classes, industrial demand follows new rooftops. Industry trends including e-commerce, technology, and re-shoring/nearshoring of manufacturing are also driving new industrial demand.”

He predicts that the current large industrial markets, Chicago, Dallas, Los Angeles, Atlanta, and Houston, will see increased demand for industrial space in the future. Boyd notes that Texas – with 30 million residents state-wide, a strong pro-business environment, low regulation, and diverse economic drivers – is very well positioned for new industrial investment and development. Other markets such as Phoenix, Reno, Nashville, Raleigh, and Columbus have similar characteristics that could make them ripe for an industrial real estate boom. 

How to Identify Under-the-Radar Industrial Investments 

Since the pandemic the U.S. commercial real estate market has experienced unprecedented increases in industrial rental rates and property values. Initially driven by escalated warehouse demand from e-commerce, the industrial market continues to see price increases due to higher mortgage interest rates, the cost of equity, increased land prices, and inflation of building materials and labor. 

Boyd noted that family offices and start-up investors may find opportunities in older and class B class warehouse properties where rents are substantially below current market levels. “In a sellers’ market, upon acquisition the initial yield on a multi-tenant industrial property may be low, said Boyd. “However, with a good leasing and management program in place, the rents can be raised over time to a market level increasing the cash flows to the owner.”  

In addition, alternative investments such as metal-clad buildings housing manufacturing operations or Industrial Outdoor Storage (IOS) facilities consisting of open-air yard space for heavy industrial equipment or parking tractor trailers are in high demand by tenants and can offer a higher yield than traditional distribution warehouses.  

To parse these possibilities, buyers should work with a trusted advisor who understands the local market and has experience to properly underwrite the future performance of the deal. The principal investor must come to the table with their ownership structure, operational experience,  source and availability of debt and equity, time horizon, and most importantly tolerance for risk. With these pieces in place, parties can act quickly when the right opportunity arises.

Originally published in Wealth Management's 2024 Midyear Outlook.