While 2016 marked another year of positive news for commercial real estate, the years to come may hold even more growth in the industrial sector. Development is up, but so are occupancy rates and rents, indicating a profitable trend. This, according to National Real Estate Investor’s third annual study of the market.
The study uses year-over-year comparisons to understand changes in sentiment surrounding the commercial real estate environment, reporting where seasoned professionals are optimistic, and where they may remain cautious. This year, the survey returned a favorable outlook not only for occupancy rates and rents, but also regarding cap rates.
According to the study, the average regional cap rate came in at 6.1 percent, compared to 6.4 percent last year and 7.1 percent in 2015. But a greater number of respondents expect the cap rates to increase over the course of 2017. In fact, more than half anticipate a rise in their region, while nearly 30 percent predict no change and 17 percent expect continued decreases.
Beyond rising cap rates, another key market indicator may change for the better in 2017. In terms of capital availability, the majority of respondents indicated a continuation of current conditions. However, almost thirty percent expected a looser lending environment, with capital becoming more widely available.
As credit opens up, 88 percent of survey respondents are bracing for increases in interest rates. What’s more, 44 percent expect risk premiums to go up as well. Loan-to-value ratios and debt service coverage ratios are expected to stay at roughly 2016 levels.
Inventory may be impacted by these changes, as more than half of respondents indicate plans to hold industrial investments in the next 12 months. A third are looking to buy, but only 13 percent plan to sell. It is fitting, then, that 72 percent of respondents thought their markets could absorb additional supply up to 19 percent of current inventory.
Interestingly, 70 percent of respondents said old industrial boxes in their markets are being converted into other uses. But many feel that this trend is being balanced out with new construction, with development in some areas outpacing the removal of old space.
Only time will tell if the predictions included in this year’s survey will bear out in the Midwestern markets. Intelica will continue to monitor industrial real estate trends to help our clients and partners find the best opportunity for growth.