SVN Research | State of the Market Report | Industrial 2023

NATIONAL OVERVIEW

The US industrial sector has been the forerunner of commercial real estate over the past decade. And so far, prevailing winds appear to be carrying the sector’s growth forward. In the early 2010s, the industrial sector’s growth was defined by the e-commerce boom, as Amazon carts replaced shopping carts and Cyber Monday became Black Friday for millennials. As a result, retailer demand for warehousing and flex spaces skyrocketed. According to MSCI Real Capital Analytics, industrial property prices grew by an industry-leading 154% over the past ten years and more than 45% since the start of the COVID-19 pandemic.

During the pandemic years, a structural shift in consumer activity amid lagging supply chains brought forward the worst congestion ever since the dawn of widespread containerization. Clogged ports and rising inventories allowed many inland industrial properties to capitalize on new demand. While most supply chain bottlenecks have gradually subsided, the new post-pandemic normal for online consumption keeps industrial in CRE’s driver’s seat.

Like all sectors, recent increases in borrowing costs have dampened transaction activity in the industrial sector. According to the industry group NAIOP, net absorption slowed during the final half of 2022, dropping to 176 million square feet from the 236 million square feet absorbed during the first half of the year. Still, industrial properties have begun 2023 performing better than some expected as demand continues to outpace supply in several key markets.

Data from the February Logistics Managers’ Index (LMI) show a rise in forward-looking sentiment for the warehouse sector. After hitting a nadir in November, the LMI future metric has climbed for three consecutive months and, in February, reached its highest mark since last Summer. Moreover, the LMI future has continued to signal expansion in the sector despite falling throughout Fall 2022 (an index reading above 50 indicates expansion, while below 50 indicates contraction).

Simultaneously, warehouse capacity experienced its first uptick in over two years, with additional supply expected to come online later this year. Still, analysts don’t expect this new supply to roil industrial markets. As Zac Rogers, lead analyst for the LMI, puts it, a modest short-term jump in warehouse capacity “will make it more sustainable over the long run.” Other industry observers appear to agree. In early March, NAIOP raised its projections for net absorption over the next two years, projecting 310 million square feet of absorption in 2023, followed by 323 million in 2024.

 

Financials

TRANSACTION VOLUME

According to MSCI Real Capital analytics, industrial transaction volume totaled $154.0 billion in 2022 — decreasing 13.3% from the previous year. Despite the year-over-year pull-back, 2022 remains the second-most active year for industrial transaction volume on record.

Compared to the pre-pandemic peak (2019) of $117.6 billion, 2022’s total rose 31.0% higher. Overall, the long-term drivers of the sector’s momentum remain intact. A return to in-store shopping eased the acute demand surge for warehouse and fulfillment space. However, the secular convergence of retail and industrial should be a tailwind for industrial sector demand for the foreseeable future.

According to the 2023 ULI-PwC Emerging Trends in Real Estate Survey, real estate investors gave a net buy rating for all tracked sub-types of industrial, including flex, fulfillment, manufacturing, R&D, and warehouse.

CAP RATES AND PRICES

Despite the long-term optimism surrounding the industrial, the sector’s cap rate profile was subject to the same market forces that saw yields rise for all other commercial property types.

After industrial cap rates sank to a new all-time low of 5.2% in Q1 2022, the effects of rising benchmark interest rates were felt throughout the year. Cap rates rose each of the next three quarters, settling at 5.3% at the end of the year. In total, cap rates rose by 19 bps between Q1 and Q4.

 

As cap rates have risen, pricing momentum has ebbed in the industrial sector. Still, prices kept rising through the first three quarters of the year, reaching a new all-time high of $164/sqft in Q3.

However, in Q4, slowing growth eventually turned to contraction, and average prices in the industrial sector fell marginally to $158/sqft — sliding 3.7% quarter-over-quarter. Nevertheless, industrial prices remain up by 3.0% from a year earlier despite the single-quarter drop.

Regional Performance2023Regional

In developing the regional industrial rankings, the SVN Research Team utilized a scoring matrix. The matrix offers a comprehensive view of how regional markets are performing within the context of growth from a year earlier, as well as compared to before the pandemic. The eight following criteria were included in the matrix:

  1. Transaction Volume: 1-Year % Change
  2. Transaction Volume: % Change Over Pre-Pandemic (2019)
  3. Share of US Transaction Activity: 1-Year Change
  4. Share of US Transaction Activity: Change Since Pre-Pandemic
  5. Cap Rates: 1-Year Change
  6. Cap Rates: Change Since Pre-Pandemic
  7. Pricing: 1-Year % Change
  8. Pricing: % Change Over Pre-Pandemic

 

TOP PERFORMERS: SOUTHEAST

Echoing a common theme across all commercial real estate verticals, the Southeast again stands out as a top-performing region. The last several years have been a renaissance for commercial real estate in the Southeast, as migration trends have favored the region, causing product demand to surge across property types.

As a result, no region has seen a larger market share increase over the past three years than the Southeast. In 2019, the year before the pandemic, $19.8 billion of industrial assets changed hands in the Southeast, accounting for 17.4% of the nation’s total. In 2022, this total surged to $31.1 billion, accounting for 20.2% of all US activity — a 2.8 percentage point gain in total market share. Southeast industrial assets have also seen some of the most intense pricing pressures in recent years, with valuations rising by 46.0% between 2019 and 2022.

 

 

 

TOP PERFORMERS: SOUTHEAST

The Mid-Atlantic’s 2022 strong showing crossed over to the industrial sector as well. While transaction volume decreased in the region compared to the year before, it did so by less than any other region. Still accounting for $15.3 billion of traded industrial assets last year, transaction volume only dipped by 4.5% in 2022.

Meanwhile, every other region saw a year-over-year decline in volume between 11.3% and 20.8%. The Mid-Atlantic also managed to buck the 2022 trend of rising cap rates. On average, cap rates for industrial assets dipped by 7 bps in 2022 compared to the year prior — the second-best mark of any region.

Our Orange County commercial real estate brokers will help you every step of the way in finding the right industrial real estate investment property, contact us for details.

 

SVN Research | State of the Market Report | Retail 2023

NATIONAL OVERVIEW

After benefiting from a pandemic-era boost in spending and consumption, retail sector fundamentals began to waiver during the second half of 2022. Investors inched into 2023 cautiously, but several critical retail growth metrics have continued to trend positively early this year.

Above all, consumer spending continues to defy the damnation of inflation. According to the Bureau of Economic Analysis, personal outlays increased by $312.5 billion in January, growing by 1.8% from December and 8.4% over the last 12 months. As consumption normalizes from sky-high 2021 growth levels, it’s been tempting to view the reversion as an impending headwind for retail. Yet, if inflation’s downtrend continues without significant pain to labor markets, today’s expenditure levels may represent a new equilibrium for consumer spending.

Since monetary policy tightening began in March 2022, consumer spending has grown at an average of 8.4% year-over-year, well above the 4.2% average rate reached during the Fed’s last tightening cycle before the pandemic. Further, during the previous cycle, consumption growth did not substantially slow until COVID-19 hit US shores, and subsequent shutdowns, layoffs, and reduced spending ensued.

Overall, the retail sector continues to go through a reorganization process. At its core, retail real estate is valued by its ability to put goods and services in the hands of consumers. That requires not only a willingness to spend from consumers — but also a preference for how they interact with goods, brands, and services across a digital-physical divide. Increasingly, online retailing has become an incubator of sorts, where successful brands will mature into brick-and-mortar as part of a second-stage expansion. While the US remains over-retailed and the market correction is ongoing, new models of success are emerging. It is not to say that momentum has (or will) suddenly rush in for retail. Still, more and more, it looks like the retail sector’s worst days are in the rearview.

 

Financials

TRANSACTION VOLUME

According to MSCI Real Capital analytics, retail transaction volume totaled $86.8 billion in 2022 — increasing 5.6% from the previous year. Retail was the only one of the “core four” commercial property types to see an increase last year.

Often, structural forces are more impactful than cyclical ones. The retail sector was already experiencing a secular reorganization when the pandemic hit. Then, the exogenous shock of the shutdown and protracted period of social distancing hyper-accelerated the retail sector’s shakeout. While the process was painful, the sector is starting to see the light on the other side. A combination of the sector having less rightsizing left to do, and retailers experimenting with new hybrid models that blend e-commerce with brick-and-mortar, is fueling optimism for the sector ahead — leading to more investment. Last year marked the first time that retail investment volumes increased in consecutive years since 2015.

CAP RATES AND PRICES

Cap rates in the retail sector followed the trend observed throughout the rest of the commercial real estate ecosystem. As capital sought deals ahead of the Fed’s widely anticipated monetary tightening, cap rates sank to new all-time lows. For retail properties, cap rates reached their low point in Q2, touching down to 6.0%. While cap rates then started picking up in Q3 and Q4, the movements were mild compared to other property types. By the end of the year, cap rates had risen to 6.2%, though they only moved by a total of 13 basis points off their Q2 nadir.

With retail cap rates starting to inch higher, the wind in the sails of pricing has died down. Prices kept on rising through the first three quarters of the year, reaching a new all-time high of $300/sq ft in Q3.

However, reflecting the impact of higher interest rates, pricing started to soften, with retail asset valuations declining to $287/sqft. While prices remain up by 1.6% year-over-year, the drop from the previous quarter was a more substantial — 4.3% — the most significant quarter-over-quarter decrease since 2009.

Regional Performance

In developing the regional retail rankings, the SVN Research Team utilized a scoring matrix. The matrix offers a comprehensive view of how regional markets are performing within the context of growth from a year earlier, as well as compared to before the pandemic. The eight following criteria were included in the matrix:

 

  1. Transaction Volume: 1-Year % Change
  2. Transaction Volume: % Change Over Pre-Pandemic (2019)
  3. Share of US Transaction Activity: 1-Year Change
  4. Share of US Transaction Activity: Change Since Pre-Pandemic
  5. Cap Rates: 1-Year Change
  6. Cap Rates: Change Since Pre-Pandemic
  7. Pricing: 1-Year % Change
  8. Pricing: % Change Over Pre-Pandemic

 

TOP PERFORMERS: SOUTHEAST

Shockingly, it turns out that attracting many new residents (who also happen to be consumers) into your region is a good thing for retail, too. The Southeast, a hotspot destination for young, starting-out families priced out of affordable housing options in high-cost markets, has seen broad commercial real estate success.
Over the past three years, retail asset prices have soared in the Southeast by 27.9% — blowing past every other corner of the country. The pricing increase comes with more investment dollars targeting retail assets.

All regions saw a rise in retail investment volume between 2019 and 2022. However, these growth rates sat between 6% and 33% for all areas other than the Southeast. Meanwhile, growth in the Southeast lapped the rest of the playing field, jumping by an incredible 75.8% in that time.

 

 

TOP PERFORMERS: WEST

How could the region that boasts Rodeo Drive not pop up here? Anchored by metros such as Los Angeles, San Francisco, Las Vegas, and Salt Lake City, the West has a unique balance of legacy gateway markets and high-growth markets that are starting to show their economic might. No region saw a bigger relative or absolute increase in investment volume than the West.

A total of $22.8 worth of retail assets changed hands in the West last year — $3.9 billion more than in 2021, representing a 20.6% increase. Moreover, after briefly losing its crown as the most active retail investment region in 2021 to the Southeast, the West narrowly recaptured its title in 2022 — securing 26.1% of all retail sales compared to the Southeast’s 26.0%.

We are ready to assist investors with Santa Ana Retail Property For Lease/Sale. For questions about Retail Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

 

 

 

 

1. Q1 2023 GDP

2. NMHC QUARTERLY SURVEY OF APARTMENT CONDITIONS

3. CONSUMER CONFIDENCE

4. MORTGAGE APPLICATIONS

5. OFFICE DEMAND

6. MSCI RCA: APARTMENT

7. MSCI RCA: RETAIL

8. MSCI RCA: OFFICE

9. MSCI RCA: INDUSTRIAL

10. CASE-SHILLER HOME PRICE INDEX

 

SUMMARY OF SOURCES

(more…)

Nonetheless, the rise in interest rates is posing problems for both banks and CRE.

It is objectively absurd to be struck in the head by an acorn and believe that the sky is falling, as occurred in the classic folktale. Yet, considering what would happen to CRE lending after two banks fail quickly after one another, particularly in light of the experience of the global financial crisis, isn’t inherently absurd. Nonetheless, it might not be logical.

Although both banking and CRE face challenges from a rapidly rising rate environment, Moody’s Analytics recently stated that when looking at the real cross-exposures of the sectors and structural differences between now and 15 years ago during the Global Financial Crisis (GFC), the conclusions are less sensationalistic and more nuanced than some headlines suggest.

Rising interest rates have already slowed deals and driven valuations lower, the business stated. There will be some CRE loan defaults as refinancing rounds approach. For instance, Veritas Investments, Chetrit Group, Columbia Property Trust, and Brookfield have all missed payments on loans this year. According to M&T Bank, 20% of its office loans are in trouble.

But the details of how these processes might manifest themselves are complicated. For instance, several cite statistics that claim local and regional banks own 70% to 80% of CRE debt. The vulnerability and distribution are more intricate.

However, just 13.8% of the debt on income-producing properties is held by the 135 US regional banks, which are commonly regarded as those with assets between $10 billion and $160 billion, according to Moody’s. The Federal Reserve (Fed), which classifies the top 25 banks as “large,” has 12.1%. 9.6% of the total is held by the 829 community banks (with assets between $1 billion and $10 billion), while the remaining 3.2% is distributed among the 3,726 extremely small neighborhood banks (with assets under $1 billion).

That is to say, the U.S. The CRE debt market is larger and more complex than is typically thought, and major banks as well as a number of non-bank lenders, including mortgage REITs, life insurance companies, and private bridge lenders, may intervene to cover any eventualities.

The distribution of CRE loans among banks was more heterogeneous than was frequently noted, as Marcus & Millichap had recently argued. While acknowledging that some loans would default, John Chang, senior vice president and national director of research and consulting services, said in a business video that most loans wouldn’t.

Yet, there are indications that the stability of banks is continuing. According to Moody’s Analytics, “developments in the Fed’s lending initiatives over the past week have been credit positive and point to likely stabilization.” The total balance sheet of the Fed decreased by $28 billion to $8.76 trillion, and the amount of money the Fed lent to the banking industry fell by $11 billion to $153 billion. The amount of outstanding loans from the Fed’s discount window decreased this week from $110 billion to $88 billion on the asset side of the balance sheet.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

1. INTEREST RATE IMPACT ON BANK SECURITIES AND CAPITAL

2. 2023 SCE HOUSING SURVEY

3. JOBLESS CLAIMS

4. Q4 GDP FINAL NUMBERS

5. MORTGAGE RATES FALL

6. INDEPENDENT LANDLORD RENTAL PERFORMANCE

7. NEW & PENDING HOME SALES

8. HOME PRICES

9. CONSUMER SENTIMENT

10. MAY RATE-HIKE PROBABILITIES

 

SUMMARY OF SOURCES

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

SVN | VANGUARD is pleased to announce and welcome new SENIOR VICE PRESIDENT CAMERON JONES who will be leading our Industrial Product Group in Southern California markets.  “We are pleased to have Cameron join the firm. Cameron brings nearly 17 years of commercial real estate experience and expertise in industrial real estate advisory to our team said Managing Director, Cameron Irons.

“Joining the innovative national platform of SVN enables me to seamlessly elevate the client experience on both local and national levels.  This strategic move empowers me to utilize my market knowledge, harness cutting-edge technology, value added services and tap into an extensive network of advisors enabling me to continue to create opportunities and solve problems for my clients.  I’m also excited to be reunited and work with Cameron Irons our Managing Director, for whom I owe my initiation into the CRE brokerage business some 17 years ago.”

Before joining SVN | VANGUARD, Cameron was a principal and partner at Ashwill Associates commercial real estate brokerage.  Cameron focused on industrial product and land redevelopment opportunities, advising owners, occupants, and investors in the acquisition, disposition and leasing of properties throughout Southern California and nationally.

For details about any industrial property needs, contact Cameron Jones at 714.240.7078 or cameron.jones@svn.com.

About SVN | Vanguard

SVN | Vanguard with offices in Orange County, San Diego, and South Los Angeles County is a full service commercial real estate brokerage. We provide Sales, Leasing, and Property Management to clients throughout Southern California. In association with SVN’s 200+ offices nationwide combine a comprehensive national footprint with local decision making, expertise and market-leading execution. All SVN® Offices are Independently Owned and Operated.

On Wednesday, the Federal Reserve published its February 2023 Beige Book. The good news is that the situation hasn’t gotten much worse. Which might not seem like much of a consolation, but given the direction things have been going—more rate hikes seem imminent as a result of Fed Chair Jerome Powell’s congressional testimony.

According to the most recent Beige Book, the economy gained some impetus in the first quarter. This can be attributed to stable manufacturing activity and growth in retail sales, according to a report from Oxford Economics. The consequences for monetary policy, however, are minor because it also suggests that wage pressures and consumer price inflation will continue to moderate.The national outlook for commercial real estate activity was solid, with some growth in the industrial market but persistent stagnation in the office market.

According to the Federal Reserve Bank of Boston, the commercial real estate market in the First District has remained largely stable since the beginning of 2023. The industry still experiences low vacancy and high lease demand, although it has recently leveled off. Food and drink are in reasonably high demand. Large-format retailers and department stores have more open positions. Most contacts anticipated a decline in future commercial real estate activity, with the industrial market outperforming other sectors.

Markets in New York were “little changed” at the beginning of 2023. Office availability and vacancies increased significantly in northern New Jersey and New York. Although vacancy rates and retail rents are both marginally down, development has stabilized to some extent.
Market players in commercial real estate continued to report stable current construction activity but observed more weakening of the pipeline as more projects were delayed, canceled, or redesigned, according to a report from Philadelphia. 

The demand for non-residential buildings in Cleveland slowed, and new projects are frequently self-funded. Real estate developers also blamed decreased demand on consumers’ growing worry over high interest rates and the status of the economy in general.

The CRE activity in Richmond remained constant from the December data. Rent costs have moderated in several sectors, and overall commercial real estate activity has slowed moderately this period due to lessened construction, leasing activity, investment volume, and asset values.Lower-tier office, multifamily, and some retail CRE development in Atlanta decreased. As more firms compelled employees to return to the office, the negative trend in the office sector slowed further; yet, elevated levels of sublease space remained a barrier to market recovery.

Between December and February in Chicago, not much changed. One contact highlighted substantial interest in retail space that had previously been held by large box tenants as evidence that the need for high-quality space was still strong. Overall, prices and rentals increased a little bit, while vacancies and the number of spaces available for subleasing also increased a little bit.Conditions in St. Louis were inconsistent, with low office demand but high industrial demand. Retail has improved, and for the first time since the pandemic began, several projects are “back in demand”. But a lot of projects are on hold as investors wait out the uncertainties surrounding rate increases.
Minneapolis remained steady since the last report, similar to some other areas, with offices struggling as vacancy rates increased as some significant tenants downsized. Industrial activity also remained robust in this area.The situation for multifamily developers in Kansas City worsened from already poor levels. In addition to interest rates, another issue is the unpredictability of the rents that operators can demand.

In Dallas, apartment leasing is “sluggish,” while occupancy and rental rates have stayed stable. Although many people are worried about the building pipeline, with rising capital costs and stricter underwriting, office demand is “lackluster” and industrial demand is still strong.

In San Francisco, CRE activity remained basically constant. With low rates and many vacancies, office demand is still poor, and according to a survey from Nevada, companies showed more interest in acquiring commercial facilities than renting them.

The February jobs data on Friday and the CPI figures on Tuesday are the next challenges.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

Consumer spending on goods for personal care, wellness, and consumables has not decreased.

Investment forecasts for the single-tenant net lease sector look strong going forward. As household demand for necessities in retail continues to be robust and retail sales data demonstrates that consumers are spending heavily in areas like grocery, personal care, and wellness products.

In a recent study by leading industry professionals, analysts observed that this behavior has the potential to produce record monthly sales totals across various necessity-based categories throughout the year. These projected record sales will have favorable implications for a single-tenant market which is already on a strong foundation to do fare well.

After an eight-quarter period during which tenants absorbed more than 100 million square feet, availability in the STNL sector was historically limited as 2023 got underway. According to researchers, discount restaurants, grocery stores, and medicine stores all have seen extensive demand. Reports state that “restrained development indicates single-tenant availability may hold firm or compress over the near term if additional vendors grow their businesses and backfill available space,” but the approximately 8.8 million square feet of single-tenant space that was under construction at the beginning of 2023 amounted to just 0.1 percent of the existing stock.

All of this is encouraging for investors since it shows that net-lease retail ownership is stable according to basic spending measures. Sales prices for average STNL properties have increased by about 16% over the last five years, and high-credit tenants and buildings with long-term leases in place continue to be investor favorites. According to Marcus & Millichap analysts, “buyers seeking long-term cash flow and less management-intensive properties may capitalize on high pricing in other sectors and move equity into single-tenant assets with high-credit tenants.”

Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial real estate investment property, contact us for details.

 

1. HOMEBUILDING SENTIMENT RISES

2. FED MEETING MINUTES

3. A BUSINESS TRAVEL REBOUND

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

5. INDUSTRIAL ORIGINATIONS FALL

6. MSCI-RCA PROPERTY PRICE INDEX

7. CPI INFLATION

8. PHILADELPHIA FED MANUFACTURING INDEX

9. NEW RESIDENTIAL CONSTRUCTION

10. US RETAIL SALES

 

SUMMARY OF SOURCES

 

 

 

 



San Diego Retail Property for lease
SVN Vanguard
San Diego commercial rental property
ORANGE COUNTY OFFICE
Orange County commercial office
17551 Gillette Avenue
Irvine, CA 92614
License # 01840569
Phone Number
714-446-0600
Fax Number
714-242-9992
San Diego commercial real estate listings
FIND US ON MAP
San Diego commercial lease

©SVN Vanguard | ORANGE COUNTY | All SVN® Offices Independently Owned and Operated