Panelists in the Industrial Power Panel: A View From the Top session shared their thoughts among over 200 industrial commercial real estate professionals gathered at the Viceroy Miami.
Transwestern’s Walter Byrd, who moderated the panel, asked this question: Over the next 12 to 18 months, what key fundamentals are you looking at in the industrial market? At that, Michael Brennan, chairman and managing principal of Brennan Investment Group; Rene Circ, director of industrial research at CoStar Group; David Harker, executive vice president of First Industrial Realty Trust; and Geoffry Kasselman, executive managing director at Newmark Grubb Knight Frank, offered their insights.
“What we look at most closely is the price of oil because we have five projects in Texas,” Harker said. “We are also looking at absorption. When you start to see a couple of markets tip where the amount of product being built is greater than the amount being absorbed, then it’s time to be cautious. We’re seeing this tip in Texas.”
From a broader perspective, Brennan says the fundamentals are in good shape. Drivers are strong on the demand side.
“When you look as an investor at markets, we are looking at the business cycle, which is a subset of supply and demand,” Brennan said. “The other is the capital cycle. We look at debt. Debt means everything. The easier the debt, the higher the prices go up.”
With that in mind, Brennan is paying close attention to what the debt markets do in the next 12 to 18 months. Two year ago, he said, borrowers were lucky to get 65% terms. Today, rates up to 75% are common. He’s not as concerned about interest rates, then, as the terms of credit.
“As an investor you would rather get a 6% rate on 88%,” Brennan said. “Higher interest rates will not ruin the party. The more liberal the terms of credit, the more realistic it is to buy more at higher prices.”
As Kasselman sees it, industrial rent increases must appear in the next 12 to 18 months because there are too many contributing factors between rising transaction costs and truck driver shortage, along with a strong desire to save costs, especially labor costs. At the same time, he said, land costs in tier one markets are going up, construction costs are going up, and there’s still more demand than supply.
“We think there is going to be another round of broker operations consolidation in the next 12 months,” Kasselman said. “I think you will see more of that kind of activity and some of the big names are going to be involved.”