October 20, 2009

By George Ratiu, Research Economist

Commercial real estate has been struggling through a difficult year. However industrial properties are finding interest with investors betting on a resurgence of warehouse space in the wake of low business inventories. With the volume of distress at the lowest level of all core property types, coupled with lower prices, the industrial sector recorded an increase in sales volume during the second quarter.

Sales of major industrial properties rose 50.0 percent in the second quarter of the year, from the first quarter. There were 217 properties that traded hands for a quarterly total of $2.3 billion. The upswing was driven by 104 warehouse investments, which shot up 107.0 percent. By comparison, flex deals actually declined 14.0 percent in the second quarter.

Based on transaction data collected to date, the third quarter is not likely to match the previous quarter's advance. Through August, there were 74 properties traded for a total of $1.0 billion, a 56.0 percent decrease from the second quarter. The number of industrial transactions is still small, but buyers are expecting lower prices and sellers are more motivated. Based on Moody's/REAL Commercial Properties Price Index, prices for industrial properties declined 12.3 percent in the first quarter compared with the previous year. Meanwhile, during the second quarter, average industrial prices dropped to from $75 to $65 per square foot. However, based on preliminary data for the third quarter, prices are hovering around the $71 per square foot mark.

Weighing the data for the first half of 2009, the industrial market faces a large amount of unsold inventory. There were $13.4 billion of industrial properties offered for sale versus $3.6 billion closed in the first six months. Cap rates have been around the 8.0 percent mark. For the second quarter, cap rates moved from 8.3 to 8.0 percent. However, the third quarter is experiencing average cap rates close to 9.2 percent.

Regionally, there were 11 markets that posted no sales activity in the first half of the year-DC, Cincinnati, Detroit, St. Louis, Hartford, Long Island, Stamford, Charlotte, Palm Beach, Houston and San Antonio. Based on the volume of transactions in the first half of 2009, the most active market has been Chicago, with 15 industrial transactions, totaling $343 million. The other active markets, by sales volume, include Dallas ($178 million), Seattle ($177 million), Los Angeles ($153 million), Orange County ($134 million) and Phoenix ($121 million).

 

Industrial Transaction Activity
Closed H1 2009
Region	Volume ($M)	Average Cap Rate	Average P/SF
Mid-Atlantic	$252.3	8.3%	$184
Midwest	$512.4	8.8%	$146
Northeast	$350.6	8.3%	$319
Southeast	$362.7	7.4%	$102
Southwest	$381.9	7.7%	$101
West	$1,055.9	7.9%	$219
Source: Real Capital Analytics, July 2009

 

 

While sales activity improved in the first half of the year, the volume of distressed properties also rose. Lack of credit continues to plague commercial real estate refinancing. In turn, the volume of troubled properties jumped by 122.0 percent in the first half of the year to over 6,000 properties, worth $114.6 billion. Distressed industrial properties accounted for 421 properties totaling $3.0 billion. The industrial data represents a 116.0 percent increase in distress for 2009. Commercial mortgage backed securities (CMBS) have the highest concentration of distress this year, at over 50.0 percent.

Analyzing the regional distribution of industrial distress reveals that the West has the largest volume of troubled assets-147 properties worth $934 million-with Los Angeles accounting for $488 million of that volume. Meanwhile, there are several metro areas where the volume of industrial distress is large and growing. After Los Angeles, towards the top of this list are New York ($204M), Columbus ($189M), Atlanta ($151M), Chicago ($123M) and Phoenix ($118M).

On a year-over-year basis, buyer composition has changed slightly. Whereas private investors accounted for 52.0 percent of transactions in the second quarter 2008, they dropped to 30.0 percent of the market during the same period in 2009. Meanwhile, institutional investors have gained market share, moving from 19.0 percent of transactions in 2008 to 35.0 percent in 2009. While transaction volumes continue to remain low, user financing also gained in prominence-from 17.0 percent in 2008 to 24.0 percent in 2009.

 

The first half of the year proved to be a difficult environment for all commercial real estate, including industrial properties. With fundamentals negatively impacted by a sharp contraction in demand, the volume of available industrial space has been rising. Meanwhile, a growing number of distressed properties pushed prices lower. The silver lining has been an increase in transaction activity during the second quarter. Another consideration is the fact that of all core property types, industrial has the lowest amount of distress.

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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