Robust Industrial Investment Shows No Signs of Slowing

Real estate buyers spent a record-setting amount of cash in the sector in the third quarter and
remain bullish on the properties amid healthy absorption and rent growth.

December 4, 2019 – The industrial real estate sector, traditionally known as the land of big, boring boxes, has become the darling of real estate amid the growth of e-commerce. Investors have poured hundreds of billions of dollars into industrial properties over the last five years alone, and not even the prospect of new construction potentially outpacing demand has tempered enthusiasm.

“With online sales continuing to grow at a faster rate than general retail sales, there is no lack of continued tenant demand for industrial warehouses and flex and distribution space,” says Rebecca Wells, CCIM, senior vice president and principal of commercial real estate service provider Lee & Associates in Indianapolis. “We expect investment activity will continue at a red-hot rate through the end of this year and into 2020.”

Industrial sales totaled $40.6 billion in the third quarter this year, the highest dollar volume ever recorded in a single quarter for the property type, according to Real Capital Analytics, a New York-based researcher that tracks commercial property deals of $2.5 million or more. An $18.7 billion transaction in September, in which Singaporean global investment manager GLP sold some 179 million square feet of logistics assets to Blackstone, skewed the numbers. But even excluding that deal, third-quarter industrial investment still topped the average quarterly sales volume of $18 billion from 2014 through 2018, Real Capital notes. Through three quarters of 2019, $77.7 billion of industrial property changed hands, a year-over-year increase of 18 percent.

The Midwest generated a healthy $11.3 billion in dollar volume through three quarters this year, according to Real Capital, an amount that was roughly on par with the same period last year. In Indianapolis alone, some $775 million in industrial facilities have traded in 2019, a year-over-year increase of 7 percent. New distribution centers of more than 1 million square feet developed by merchant builders accounted for many of the trades, illustrating the strong appetite that investors have for the newest, biggest and most modern product in the region, Wells says.

Industrial property cap rates on deals in the Midwest averaged 7.5 percent through the first nine months of 2019, the highest of any region, according to Real Capital. Still, several bulk distribution properties in the Midwest sold at cap rates of 5.5 percent or less, Wells states. Nationally, the average industrial cap rate was 6.3 percent for the year at the end of September, just a tick lower than the prior year.

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