Rents and demand for US industrial real estate continued to rise last year, but the sector’s sales boom appears to be slowing. Industrial transactions dropped, with interest rates and economic uncertainty the main reasons for a decrease in activity.
Sales shifted during the second half of last year as the Federal Reserve was in the middle of its interest rates hike campaign to tamp down on inflation, while prices increased steadily. In the past three years alone, the average sales price of an industrial asset soared 59%. Last year, the typical industrial unit cost $132/sq ft.
In Europe, the war in Ukraine and the lingering effects of the pandemic have also instigated a surge in inflation and resulted in a rapid rise in interest rates for companies – and households – that took on debt during a decade of easy monetary policy.
In Sweden, for example, commercial property companies need to refinance around SEK300bn ($28.69bn) of loans over the next couple of years. The appetite for risk among banks and investors has also dampened.
Against this backdrop, it seems the UK industrial real estate sector faces a period of readjustment. After years of successive growth, experts are predicting that prices will taper. However, this presents opportunities, with the industrial and logistics market remaining strong from an occupational point of view, due to demand and growth from the online retail sector and a lack of supply and space – especially in areas with strong transport links.
Twenty years ago, industrial properties were often large, dusty warehouses, but they are very different now. They are spaces that incorporate employee well-being and have great amenities.
Londons industrial market outlook is expected to remain positive, but is likely see a more realistic growth trajectory. Big box logistics and sheds in UK regions can expect less demand this year, but also lower supply, so rents should remain strong.
They say in times of uncertainty, opportunities arise, and it will be a buyers’ market across Europe’s commercial property sectors this year, with asset prices softening. Over the past few years, certain parts of the commercial sector have been affected more, primarily retail and office sectors. But even the industrial sector, which has previously been immune to market volatility, will present good value opportunities for savvy investors.
In New Zealand, red-hot inflation and surging interest rates also present headwinds for the commercial property market, but there is still a strong demand for high-quality office and industrial space. There is a greater lack of supply in the logistics sector than is the case for other global markets, meaning values are likely to remain high. In challenging times, you often see a flight to quality, and in New Zealand, this has been a trend both in the industrial and office sectors, as providing great spaces helps attract quality staff.
Twenty years ago, industrial properties were often large, dusty warehouses, but they are very different now. They are spaces that incorporate employee well-being and have great amenities. Occupants want to show quality workspace to potential clients, so they can see what the company stands for and how it operates. It will be interesting to see how businesses react this year once the global market resets following a series of geopolitical and financial adjustments. These will undoubtedly present some interesting opportunities for international investors.
Tasos Stavrou is director of global business development at the Leading Real Estate Companies of the World