E-commerce Drives Industrial Demand in Q2, but Leasing Slows

Warehouse cap rates rose in Q2 driven by sustained e-commerce and supply chain demands despite a slower leasing pace.

Jordan B. & Han-Gwon Lung
September 10, 2024

Together with

Good morning. E-commerce and supply chain demands are driving up industrial rents in cities like Charlotte, Miami, Boise, and Phoenix, though speculative construction and leasing activity have tapered off by early 2024.

Today’s issue is brought to you by AirGarage—maximize parking revenue and NOI at your property.

🎙️ No Cap Episode 8: Co-hosts Alex and Jack discuss Dallas' rise as a finance hub, major developments from Goldman Sachs and Wells Fargo, and Trimont's acquisition of Wells Fargo's $475B CRE loan portfolio.

Market Snapshot

S&P 500

GSPC

5,471.05

Pct Chg:
+1.16%

FTSE NAREIT

FNER

828.01

Pct Chg:
+0.89%

10Y Treasury

TNX

3.714%

Pct Chg:
+0.015

SOFR

1-month

5.34%

Pct Chg:
0.0%

*Data as of 9/09/2024 market close.

MID-YEAR REPORT

E-commerce Drives Industrial Demand in Q2, but Leasing Slows

Warehouse cap rates rose 23 basis points in Q2, averaging 6.42%, driven by sustained e-commerce and supply chain demands despite a slower leasing pace.

What happened: Integra Realty Resources' mid-year report shows e-commerce and supply chain demands are driving rent hikes in Charlotte, Miami, Boise, and Phoenix, though speculative construction and leasing slowed by Q1 2024.

Higher vacancy rates due to new supply: Increased speculative development has led to higher vacancies in Chicago, Indianapolis, Dallas, and Los Angeles, while cities with limited new construction, like Cleveland and Detroit, continue to maintain lower vacancy rates and price stability.

Investment Metrics:

Cap Rates: Warehouse cap rates rose 23 basis points to 6.42% nationally, with the largest increase in the East (up 44 basis points to 6.92%). Flex Industrial properties saw a rise of 17 basis points to 6.93%.
Market Rents: Warehouse rents grew by 3.06% to $7.57, and Flex properties increased by 2.91% to $12.00. The East led rent growth for Flex properties, with a 3.88% rise to $13.02.
Vacancy Rates: Warehouse vacancy rates rose 181 basis points to 6.30% nationally, while Flex properties saw a 100-basis-point rise to 6.96%. The West had the largest regional vacancy jump for warehouses, up 247 basis points to 6.49%.

➥ THE TAKEAWAY

Big picture: Industrial markets with land constraints and available workforces, such as Chicago, Kansas City, Raleigh, and Northern New Jersey, continued to see rental growth due to infrastructure improvements. Additionally, adaptive reuse is gaining traction in urban areas where industrial land expansion is limited, driving up prices for remaining inventory.

TOGETHER WITH AIRGARAGE

Upgrade your Parking Operations and Earn More Income

Increase your property's net operating income with AirGarage’s full service parking management.

Legacy parking companies rely on manual labor and expensive third party hardware & software products to manage their facilities. This increases their operating expenses and hurts property owners' bottom line.

AirGarage is a vertically integrated parking management and technology solution that maximizes your income by increasing traffic, optimizing revenue per vehicle, and decreasing operating expenses.

The average property owner that switches to AirGarage from a legacy parking operator sees a 23% NOI increase in the first year.

Talk to AirGarage today and let us show you how we can increase your NOI with a custom proposal for your parking facility.

*Please see the advertising disclosure at the bottom of this newsletter.

✍️ Editor’s Picks

Very optimistic: RXR (RXR) CEO Scott Rechler is forecasting a new CRE ‘paradigm’ after rate cuts later this year that might see demand surpassing supply by 2026.
Loan acquisition: Sand Capital is targeting commercial property loans across the U.S., focusing on retail assets in the Midwest and Southeast, with loan sizes from $2M to $10M. (sponsored)
High stakes High Line: Related Companies faces opposition from Friends of the High Line over its Hudson Yards casino project, with zoning and design conflicts delaying progress.
Real estate rivalry: Rupert Murdoch’s News Corp is considering acquiring the UK’s largest real estate portal, Rightmove, through its subsidiary REA Group.
Taxing times ahead: NYC's property tax laws may change dramatically after the state's highest court ruled in favor of a suit challenging the legality of the current tax code due to discrimination and unfairness.

🏘️ MULTIFAMILY

Sky-high selling: Brookfield Properties just keeps on selling, most recently listing a luxury tower with 411 units and a senior housing property in Chicago's South Loop.
Affordable apartments: In 1H24, demand for mid-priced, 3-star apartments surged, with 75.8K units absorbed (up 86% YoY), outpacing luxury property demand.
Bronx boom: MF1 Capital secured $165M for JCS Realty's One38 Bronx project, financing a 579-unit mixed-use development led by Jacob Schwimmer.
Hollywood pivot: The Sunset + Highland project in Hollywood, led by entertainment veterans, has pivoted from offices to apartments, and will include 743 units, 11 KSF of retail, and 834-vehicle parking.
Skyward shift: The town of Prosper, Texas, has banned new garden-style apartments, allowing for up to eight-story buildings to encourage high-density, mixed-use developments.
Rate cap woes: A&E Real Estate's $600M rent-stabilized CMBS loan faces delinquency after a 200% loan-to-value ratio increase, driving up the national CMBS delinquency rate.

🏭 Industrial

Southern success: Boston-based Longpoint Realty Partners expanded in South Florida, buying a 114 KSF Medley property for $27.2M, reflecting high industrial demand in the area.
Data Center dilemma: Despite being home to major data center firms, Denver struggles with data center development due to the absence of tax incentives, environmental concerns, and regulatory hurdles.
Cookie chronicles: Stonepeak acquired a 1.1 MSF industrial portfolio in the Dallas-Forth Worth area from JP Morgan Asset Management (JPM).
Sliding South: Florida's privately owned Basis Industrial now holds over 1 MSF of industrial space after 14 recent acquisitions, all in DFW and Houston.

🏬 RETAIL

Big bankruptcy: Big Lots filed for Chapter 11 bankruptcy and agreed to a $620M sale to Nexus Capital, aiming to streamline operations and close up to 315 stores.
Better on paper: Walmart’s attempt to use 3-D printing for a store expansion highlights the technology's potential but faces delays and costs similar to traditional construction.
Retail Renaissance: The sale of the Barnsdall Square strip mall in Los Feliz highlights the demand for high-quality, brick-and-mortar retail locations in the sought-after LA neighborhood.
Straight rejected: 7-Eleven’s (SVNDY) Japanese parent just rejected a staggering $38B takeover bid by Circle K parent Alimentation Couche-Tard because the offer ‘grossly undervalues' 7-Eleven.

🏢 OFFICE

Distressed surge: The CMBS special servicing rate hit 8.46% in August, its highest level in 3 years, as the office sector continues to see a distressed assets surge.
Big-time handover: IBM (IBM) will take over Meta's (META) 320 KSF office lease at Austin’s The Domain in January 2026, extending the new lease through 2040.
AI pioneer: Nvidia (NVDA) is seeking 300 KSF of office space in Austin, potentially quintupling its current footprint and, bolstering the city's status as an AI innovation hub.

🏨 HOSPITALITY

Park your profits: Parking revenue at American hotels rose significantly in 2023, with profits from parking up 32%, while resorts enjoyed 48% profit growth.
Pretty penny: Coral Gables-based MG Developer acquired the 176-room Sonesta-branded Regency (H) Miami Airport hotel for $36M, marking its first venture into the hospitality sector.