Wednesday, March 27, 2013

5 Reasons You Should Buy a Warehouse

Move over, multifamily—industrial may be the next growth wave. PPR senior real estate economist Shaw Lupton has been advising institutional investors to get into the sector, and he tells us why.

1) Demand

Dallas' modern product (post-1990 and over 100k SF) netted 7.8M SF of positive absorption last year. That brought us to 9% vacancy, and Shaw expects a slight increase in absorption this year. Nationwide, 2012 was a sluggish year but ended on a strong note with net 78M SF absorbed (in line with 2011). Q4 set a record for US warehouse demand. He expects this year will look slightly stronger (but not by a lot thanks to economic headwinds).

2) Ability of supply to shut down quickly

Coupled with strong demand, almost nothing is under construction now. 2M SF is under way in Dallas, but more than half of that is pre-leased. Last year saw negative net completions nationwide, as the pace of space removals more than offset deliveries. This year is ramping up with 35M SF in the ground, but that's only 0.3% of inventory. (And 55% of it is BTS.) That's barely up from the trough and well below the last cycle, when we added 1.5% annually. He expects construction will ramp up rapidly over the next year or two as rents increase. But in the meantime, there's a great window where investors can benefit.

3) Outsized rent growth

Net asking rent in Dallas rose 4.6% last year, and Shaw expects about 3% or 4% growth this year. Things aren't looking as bright nationwide: We're 8% below the long-term trend. But that means a significant upside in asking rents today.

4) Below replacement cost… everywhere else

Nationwide, overall pricing per SF is 12% below the long-term trend. In Dallas, transaction prices are actually clocking in above their long-term trend. That means it's going to be tougher to find deals on existing space, but it should be easier to make development pencil out. Glass half full, right?

5) Cash yields

Industrial yields are some of the highest of the four main food groups. Although warehouses may seem a little pricey, they're worth it, thanks to strong fundamentals. Warehouses aren't known for their growth, but Shaw's tracking 3.8% yields (after adjusting for below-the-line expenses). That's about 23% better than office yields, which is driving players from other sectors into the industrial arena. (Which is why every industrial building now comes equipped with a water cooler.)