Frozen Debt Markets, Local Pushback Chipping Away At Industrial Cash Cow

Owners of industrial real estate continue to enjoy robust demand, low vacancy rates and shifting consumer behaviors toward e-commerce that continue to fuel the asset class — but a slew of challenges threatens to bring tougher times. 

Frozen debt markets are making deals almost impossible to finance, panelists said at Bisnow's Northeast Industrial and Logistics event this week, which was held at the New York City Bar Association in Midtown. The environment of rising interest rates is generating uncertainty that has spooked some investors. 

Added to that challenge for developers are vocal local communities pushing back against warehouse development with greater vigor than ever before. But pushing back against all of this, they said, is a deep pool of companies that need more logistics space.

“I've never been in a market where we have 2.5% vacancy and you can't find a capital partner,” Trammell Crow Co. Managing Director Andrew Mele said at the event. "It's the most interesting thing. And I get it, people are like, 'Hey, let's not catch a falling knife ... let's wait six months.'”

The demand may be slipping, but the market for warehouses is still historically tight. National industrial vacancy ticked upward in the third quarter to 4%, just above the all-time low of 3.9%, according to Savills. Leasing activity dipped below 200M SF for the first time in eight quarters.

The slowdown was driven by inflation and interest rate hikes weighing on industrial tenants, but Savills characterized that leasing drop as only a “limited” sign of a cool-off. The tenant-focused brokerage predicts rent growth to cool after having spiked as much as 40% in some markets last year. 

Amazon has made waves in the industry over the last year after closing and canceling or postponing plans for dozens of future facilities. As it has pulled back, panelists said other types of companies have backfilled some of that demand.

“Two years ago, [tenant demand] was heavy e-commerce. It was Amazon, Amazon and Amazon," Turnbridge Equities Managing Principal Ryan Nelson said. “That really flipped last year. And now it's largely [third-party logistics] that's driving the market.”

AKF Group partner Debbie Reider said she has seen an uptick in demand for fresh foods in urban markets. DH Property Holdings Head of Development Michael Bennett said his company is seeing significant demand from logistics-adjacent users, such as those in package expediting.

Panelists said high demand is affecting the sales market for these kinds of industrial properties, making sellers less likely to budge on price even as borrowing costs have shot up this year.

Realterm Vice President of Investments Ben Andreycak predicted the stalemate could last some nine to 12 months, as the bid-ask spread remains stubbornly high.

“I think everyone up here is still looking for deals, but the bar has risen to a point where, because of the debt market, because of cap rate assumptions, the deals that we think are great deals are way off of where sellers have been seeing prices over the last three to four years,” he said.

Prologis, the largest developer of industrial properties, said in its earnings statement this week it expects to pull back on sales and speculative development in response to the financing environment.

At the event, Prologis Managing Director Fritz Wyler said he expects a period of sluggish activity, then a serious return in transaction volume as buyers with access to cash who have previously been forced out of the market are presented with opportunities. 

“I think a lot of people are now starting to look around waiting for markets that they couldn't get into,” he said. “Jersey is still a market, LA is still a market, even Miami today. People want to get market share, and they've been blocked out because there's 20 to 30 bidders on something.”

What is shaping up to be more problematic for industrial developers than the capital markets is increasing community aversion to warehouse development, panelists said.  

It is an issue that has come up in the most active warehouse market in the country, California's Inland Empire, where multiple cities have voted to put temporary bans on warehouse development amid growing frustration about the impact that kind of development has on communities.

“I think the finance side is going to cover itself one way or the other,” said Steven Beyda, the head of acquisitions at Woodmont Properties. "I think the one thing that we in this room can't really control is the legislative and administrative process with towns in the state of New Jersey, in particular, becoming extremely anti-warehouse. We as a group have to do a better job facing the community and presenting the value and the advantages of industrial markets to the state itself.” 

He said this issue is going to be the biggest challenge to building industrial over the next decade. Just last month, Queens Council Member Tiffany Cabán approved a major housing development in Astoria called Hallets North, saying it would fall to last-mile distribution if she didn't give the developer wanting to build a 1,400-unit development there the approval needed. Last year, Two Trees Management threatened to sell its site in Brooklyn to a logistics developer if it didn’t get the required rezoning to build a mixed-use project on 3.5 acres on the Williamsburg waterfront that will feature more than 1,000 residential units.

“Fifteen years ago when we went out to a town, our pitch was very straightforward: It was jobs and taxes, right?” Greek Development’s Dave Greek said. “That's what we are bringing to your town and, by the way, we don't bring housing, so we don't bring kids into your schools. But as e-commerce has grown up and people have gotten more familiar with how these facilities operated and the pushback got a lot more grassroots and a lot stronger ... we make some different design decisions, and we certainly approach townships a little differently. “