4-27-18

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Real Estate Journal — Spring Preview —April 27 - May 10, 2018 — 13A

M id A tlantic

I ndustrial NJ

By Marc Duval, HFF 2018 Industrial Real Estate Trends

I

impressive year-over-year rent growth (~7.0% nationally), historically low vacancies (~5.0% nationally), and posi- tive economic fundamentals including strong absorption and limited development. Surplus capital and increasing demand has driven pricing for Class A distribution space in core locations to the 3.75% to 4.5% cap rate range. We expect north of $200 per square foot for Class A distribution space in core locations to become the new normal. Funding Deficits Largest Among Investors With dry powder at all-time

highs, increasing industrial allocations, and foreign invest- ment up approximately 30% in the segment, we expect to see record pricing and significant activity in 2018. Institutional industrial allocations will be surpassing retail allocations over the next year, as inves- tors increasingly meet their retail targets with industrial product. This is possible due to the amount of cross-over in e-commerce between retail and industrial property types. Insurance companies and sov- ereign wealth funds have 200 – 300 basis point funding defi- cits relative to their targets

which results in large inbound queues among fund managers. It is clear the under allocation has been amplifying demand for industrial product. Expanding Market and Product Types Due to increasing demand and competition between debt providers, investors are more willing to expand to secondary markets and unique product types, including those with higher levels of office fit-out, class B and C product, short- term single tenant opportuni- ties, and cold storage, in return for higher yields. class B, light industrial product is seeing a

continued on page 22A Capital Deployment via Large Development Sites Despite the demand for industrial product over the past three years, development has remained limited due to the lack of entitled land sites, increasing construction costs, significant amount of institu- tional interest at a 25% to 30% premium to replacement costs. In addition, as many investors have noted, no industrial asset is too small in northern New Jersey as the urbanization trend makes smaller, but well- located buildings useful as last-mile distribution centers.

ndustrial has been the most sought-after proper- ty type for the real estate

investment community over the past three years and all indi- cations point to that con- t i nu i ng i n 2018. His- torically, in-

Marc Duval

dustrial property demand has been a function of economic growth. However, the recent growth of e-commerce, 15% annually, and the need for “one-day delivery” has fueled a secular shift in industrial use and tenants. Forecasters predict for every $1 billion in additional e-commerce sales, another 1.25 million s/f of distribution space is required. This means that at least an- other 85 million s/f of addition- al distribution space will be demanded in 2018. Therefore, despite GDP growth hovering around 2% annually for the past seven years, industrial real estate will continue to outperform due to e-commerce driving the market. Transaction Volumes/ Sizes Continue to Rise According to Real Capital Analytics, total industrial volume has increased from a low of $10.3 billion in 2009 to a high of $78 billion in 2015. After a drop in volume in 2016, 2017 had the second highest transaction volume in history at $72.2 billion, a 20% year-over-year increase. The Northeast alone accounted for over $8 billion of that activity. In the Northeast, we have seen year-over-year growth of 7% attributable to a com- bination of single-asset sales and larger portfolio transac- tions including the sale of The Hampshire Companies’ 1.25 million square foot northern New Jersey portfolio as well as Duke’s purchase of a 3.4 million square foot portfolio of which 2.3 million s/f are in northern New Jersey. There is a significant amount of capital demand for large Class A port- folios, and the scarcity of op- portunities is creating pricing premiums of 7.0% to 12.0%. The capital markets are will- ing to pay these premiums for core industrial product with size. Industrial Pricing Remains Strong Investors have flocked to the industrial sector because of its

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