Known as a top tourist destination because of its warm climate, sandy beaches, historic sites and enchanting cities, Spain is a nation of nearly 47.5 million people. Beyond tourism, Spain’s top industries include auto manufacturing, agribusiness and energy.

During the year ending in second-quarter 2023, Spanish investors proved to be quite interested in U.S. commercial real estate. During this period, some of Spain’s top companies acquired 17 U.S. properties totaling more than $2.2 billion, according to MSCI Real Assets. This amount alone is impressive enough. But the shocker is that the figure is 5,000% more than what Spanish investors spent from mid-2021 through mid-2022.

The increased activity vaulted Spain to fourth place on MSCI’s ranking of the top 25 sources of capital into U.S. commercial real estate. Spain trailed only Japan, Singapore and Canada on this list. Spain’s ascent has been meteoric as it ranked No. 7 in calendar year 2022 and No. 25 in 2021.

One of the main reasons for this considerable growth in activity was the real estate expansion of Pontegadea, a multinational investment company owned by Spanish billionaire Amancio Ortega. He made his fortune by founding the fashion retailer Inditex, the largest fast-fashion group in the world and the owner of the multinational clothing chain Zara.

Pontegadea, which is developing a large real estate portfolio, has been spending hundreds of millions of dollars to acquire a variety of U.S. properties. These range from Amazon-leased office space in Seattle to warehouse and distribution centers in California, Florida and Pennsylvania.

According to MSCI, Pontegadea acquired 12 industrial properties and one apartment complex in 2023. The main seller of the industrial assets was Blackstone, one of the largest landlords in the U.S. Pontegadea appeared to be capitalizing on Blackstone’s need for cash amid the commercial real estate downturn. Blackstone was known to be selling parts of its portfolio, including casino assets and various industrial properties that were performing well.

In 2022, Pontegadea acquired five logistics centers located in Tennessee, South Carolina, Virginia, Pennsylvania and Texas. The largest single U.S. deal by Pontegadea in 2023, according to MSCI, was the August acquisition of a 45-story apartment complex in Chicago for $231.5 million.

Pontegadea isn’t the only Spanish company that has recently expanded its real estate empire. The Mallorca-based travel conglomerate RIU Hotels & Resorts acquired a six-story office building in Manhattan for $173 million. The October 2023 purchase was an intriguing move for RIU, which owns 96 hotels in 20 countries. The building was slated to be demolished to make way for a hotel tower, but the previous owner was unable to secure permits from the city. It will now be up to RIU to convince officials to back a new plan.

Only time will tell if Spain’s major investors continue to find U.S. apartment complexes, offices and industrial space enticing. But it seems like a safe bet that the wave of acquisitions by Spanish investors has yet to end. ●

The post International Investments: Spain appeared first on Scotsman Guide.

Kneecapped by a maelstrom of economic and supply-chain woes — a downshift in imports, cooling reliance on e-commerce, surplus inventories, recession fears, high interest rates, and lagging sales of furniture and appliances — net absorption plunged to 164.8 million square feet in 2023. That’s a steep 61% fall from 422.7 million square feet in 2022 and a 69% decrease from the all-time high of 524.7 square feet one year prior, according to Lee & Associates. Moreover, 2023’s total absorption was 32% less than the average absorption during the five years prior to the COVID-19 pandemic.

The demand downshift is geographically broad, but some areas have been hit harder than others, especially in the West. Los Angeles, Seattle, and California’s Inland Empire all saw disproportionately large upticks in available space. Part of the vacancy swell is related to recent cargo patterns; the import slowdown that has persisted since November 2022 has been felt most acutely at ports on the West Coast, which only recently saw a major labor dispute between dockworkers and employers get resolved with a new contract.

Another factor in the cooling of demand is the ongoing influx of new space nationwide. A record 528.7 million square feet were added last year, a swell of deliveries that’s expected to bump the vacancy rate even higher through the first half of 2024, per Lee & Associates. New space has already raised the industrial vacancy rate from an all-time low of 3.9% in mid-2022 to 5.9% to close 2023. And more is on the way, with some 451 million square feet under construction in 87 markets analyzed by Lee & Associates. Most of that space remains unleased.

There are, however, indicators that suggest that tenant demand is set to stabilize, Lee & Associates reported. For one thing, with the pipeline so active, construction starts have dropped to their lowest level in a decade. For another, even with all the new space and the climbing vacancy rate, vacancy is still well below the 20-year average vacancy rate of 7.3%.

And some markets remain in the midst of shortages of distribution space even as demand sputters on a national basis. Even with construction pipelines busy, many coastal markets, like South Florida; Richmond, Virginia; northern New Jersey; and Pennsylvania’s Lehigh Valley don’t have enough deliveries to ease shortages of distribution space in a meaningful way. Some large port cities on the East Coast, like Jacksonville and Tampa, are dealing with space shortages due to the ongoing diversion of Asian cargo through the Panama Canal to Atlantic entry points.

The post Demand downshift a cause for concern in industrial real estate sector? appeared first on Scotsman Guide.

Perhaps the biggest positive development to impact industrial real estate last year was the normalization of activity at the nation’s ports, many of which saw cargo volumes return to pre-pandemic levels. The pendulum of consumer preference has swung back toward services since lockdowns have dissipated and inflation has reduced many Americans’ spending power, moderating the demand for goods.

Yardi pointed to the ports of Los Angeles and Long Beach, two of the busiest on the West Coast, as an example. Together, the two ports handled 17% fewer containers through the first 10 months of 2023 than they did during the same time frame in 2022. Nominally, that’s not great news, but many of the country’s largest cargo ports were stretched thin during the pandemic era, and the recent easing of container traffic has been a boon for efficiency.

Port activity has also been subdued in part by a recent surge in nearshoring and reshoring. Mexico surpassed China last year as America’s biggest trade partner, with 15.5% of total export volume in October from Mexico compared to 15% from China, per figures from the U.S. Census Bureau. Recent upticks in manufacturing have also provided a boost to industrial real estate in general, with the growth in supply chains for electric vehicles, in particular, breaking ground in the Midwest and South.

Unfortunately, such developments have been offset by the interest rate landscape of the past year. Only $48.6 billion in industrial property sales occurred from January through November, compared to $129 billion in 2021 and $101.2 billion in 2022. Sales prices, however, have remained buoyant, growing from $123 per square foot in 2022 to $130 in 2023.

The post Yardi Matrix: Mixed bag for industrial sector in 2023 appeared first on Scotsman Guide.

Per MSCI data, this dollar amount ranked No. 8 among foreign sources of capital into U.S. commercial real estate during that time period. Bahrain finished just behind nearby United Arab Emirates, another moneyed Middle Eastern powerhouse. It’s familiar territory for Bahrain: During the 2022 calendar year, the little island country in the Persian Gulf was 10th among overseas sources of funding. In 2021, it was fifth.

It’s worth noting that in dollar terms, Bahrain’s deal volume plummeted 67% from midyear 2022 to midyear 2023. That’s a significant amount, to be sure, but not out of the ordinary given the state of commercial real estate investments, cross-border or otherwise, over the past year. Of the nine other countries among the top 10 foreign funding sources in that time frame, six posted annualized declines, and five of these pullbacks topped 30%.

Possibly more prescient than the large dip by Bahraini investors as a whole is the activity of the nation’s most prominent stateside real estate investment entity — the aptly named Investcorp, a global funds manager for institutional and private clients with offices worldwide. Among foreign buyers of U.S. commercial properties, InvestCorp snapped up 14 stateside properties and posted the eighth-largest dollar volume for the year ending in Q2 2023, MSCI reported.

The firm has remained proactive since then, announcing a $216 million purchase of an industrial portfolio this past September. The acquisition, peppered across five markets (including Atlanta, Boston and San Antonio), spanned some 1.6 million square feet across 31 infill warehouses with a collective occupancy rate of 94%.

The move pushed Investcorp’s industrial holdings within the U.S. to about 42 million square feet across more than 600 buildings with an aggregate value of $4.8 billion. “Industrial assets have enjoyed consistent performance throughout the recent market volatility as a result of strong fundamentals that are driving outsized demand and considerable rent growth when compared to other asset classes,” said Herb Myers, the company’s co-head of North American real estate, after the September acquisition.

That’s a ringing vote of confidence in U.S. industrial real estate resilience from Bahrain’s most active overseas investment company. Coupled with the strong record for Bahraini investors in recent years, it seems safe to expect another relatively robust year in 2024 from the Middle East’s little investment engine that could. ●

The post International Investments: Bahrain appeared first on Scotsman Guide.

Sales of hybrid vehicles were up more than 50% annually in October, while plug-in EV sales grew 22% annually in the same month, per Argonne National Laboratory. The strong increases contributed to more than 1.1 million EVs sold to date in 2023, leading Yardi to estimate that “millions” of square feet in new industrial space will be necessary to accommodate EV manufacturing facilities, as well as facilities for the production of batteries and other supplies.

A surge in new facilities was spurred in large part by the Inflation Reduction Act of 2022, which gives financial assistance to EV manufacturers and grants tax breaks for such vehicles built stateside. In May, Hyundai and LG announced a $4.3 billion battery plant in Georgia, then doubled down in August, disclosing an additional $2 billion investment in the complex. Toyota, meanwhile, recently pledged an another $8 billion towards an under-construction battery plant south of Greensboro, North Carolina.

The ramp-up in supplier network buildout, meanwhile, has already begun in many parts of the country as well. Epsilon Advanced Materials, headquartered in Mumbai, announced in October a new North Carolina factory to produce synthetic graphite anodes for EV batteries. The $650 million plant will mark the first investment from an Indian company in the American EV market, according to a statement from Epsilon. Another international company, Cnano Technology USA, revealed in August that it plans to invest $94.7 million into a Kansas City-area manufacturing facility for liquid conductive paste, a component also used in EV batteries.

Not all the news around EV manufacturing has been rosy, in part because of a recent slowdown in adoption. Yardi noted recent reports of EV inventories at many car dealerships building up as consumers worry about affordability and access to charging. Some companies are scaling back on their investments as a result; Ford, for example, has announced the delay of $12 billion worth of EV-related projects.

Subsequently, Yardi conceded that its short-term outlook for EV-related facilities is “a bit rocky,” but was swift to add that the emergent segment will be a driver of industrial demand in the long term. The Inflation Reduction Act, Yardi noted, “provides both a carrot and a stick,” making the impact of the EV movement on industrial real estate a factor to watch moving forward.

The post Electric vehicle manufacturing poised to boost industrial real estate appeared first on Scotsman Guide.

In first-quarter 2022, West Virginia was the only member of this region to record positive economic growth. In Q1 2023, the region was led by the District of Columbia, which posted yearly gross domestic product (GDP) growth of 1.4%. North Carolina, South Carolina and Virginia each registered gains of 1%, with Maryland at 0.7% and West Virginia at 0.2%.

The region’s most powerful economy is North Carolina, which had a GDP of nearly $716 billion in 2022. Once known as a center for textiles, furniture and tobacco, the state is now a hub for manufacturing, research and technology. It boasts a manufacturing workforce of more than 455,000, the largest in the Atlantic Region. North Carolina also has more than 250 automotive manufacturers. Vietnamese automaker VinFast announced plans last year for a $4 billion electric vehicle plant at the Triangle Innovation Point southwest of Raleigh.

Virginia is second in the region with a GDP of $663 billion in 2022. The northern part of the state benefits from proximity to Washington, D.C. It’s estimated that 30% of Virginia’s economy is tied to federal agencies, workers and contractors. Many of the nation’s military headquarters and top federal agencies (including the CIA and the Pentagon) are in Arlington and other parts of Northern Virginia. Long an agricultural center, Virginia is now known as a trade, technology and manufacturing leader, but it remains a major producer of vegetables, tobacco, cattle and poultry.

Maryland has a GDP of $480 billion. Like Virginia, the state’s proximity to the U.S. capital is a major influence on its economy. The Capital Region, which includes five counties closest to Washington, D.C., accounts for about half of Maryland’s GDP. Top economic sectors there include IT, telecommunications, aerospace, defense and biotechnology.

South Carolina has a GDP of $297.5 billion. Its largest employment sectors include trade, transportation and utilities; government; professional and business services; leisure and hospitality; and manufacturing. The Palmetto State is No. 1 in the nation for exported sales of tires and passenger cars. BMW, Mercedes Benz and Volvo are among the automakers with operations there.

The District of Columbia had a GDP of $165 billion last year. The main industries include the various aspects of the federal and local government. Professional, scientific and technical services combine with administrative positions to account for more than 40% of all employment. The technology, hospitality and tourism industries also are key economic drivers.

West Virginia has the smallest economy in the region with a GDP of $97 billion. But it continues to be one of the nation’s most important mining states through the production of coal and natural gas. ●

The Richmond area continues to be in growth mode, with total employment increasing by 4.2% during the year ending in third-quarter 2023, according to Cushman & Wakefield. Such growth has also influenced the industrial property sector, where more than 1 million square feet (msf) of new space was delivered in the quarter.

About two-thirds of this space wasn’t preleased, helping to push up the marketwide vacancy rate to 3.3%. Some of the projects that were added in Q3 2023 include a 400,000-square-foot block of sublease space and a 242,000-square-foot data center.

While industrial starts have slowed compared to prior years, Cushman & Wakefield reported that the city’s current project pipeline totals more than 4.6 msf, with about 84% of this total preleased. Such figures point to a strong industrial marketplace. Leasing activity in the third quarter topped 1 msf and exceeded 3.8 msf for the year. A strong fourth quarter was also expected.

Another sign of the sector’s strength is evident in rent growth, which rose an impressive 11.6% during the first nine months of the year and was 57% higher since the start of 2020. New leases and renewals for second-generation space are going for $8.50 to $9 per square foot, better than the marketwide asking rent of $7.60.

What the Locals Say

Raleigh is probably in a better position than most cities right now, in all honesty. The city has become a hotspot for people from all over the country, whether they are from the West Coast, the Northeast or even Florida. That attraction of new people has trickled down to the commercial space, so businesses in general are still growing here.

That means properties are still being sold and refinanced, but that isn’t true of all buildings. Like the rest of the country, there are some properties that are vacant and others where landlords are offering free rental space to make it appear that there are tenants. With that said, Raleigh is one place where things are still moving and lenders have yet to hit the pause button.

Industrial and multifamily properties are still doing well. Airbnb rentals are OK. They are still able to rent but they are not as strong as they were a year ago. Retail is doing OK in Raleigh as well. Where you see the most vacancies right now are in the office sector. Those properties are having a hard time filling up, probably because of the work-from-home movement.

As for 2024, we are expecting more of the same. We’re getting more calls from borrowers telling us that some lenders are no longer lending. I see that continuing. I think the number of lending sources is going to shrink. But there will still be some lending, which means the market isn’t going to freeze. That is very important. If the market freezes, everybody has a problem.

3 Cities to Watch

Annapolis

The state capital of Maryland is steeped in American history and boasts a strong tourism industry. The charming port city of 40,000 people is situated on Chesapeake Bay, and it’s known for its various boatyards and as the home to the U.S. Naval Academy. St. John’s College, with roots dating back to 1696, is also located in the city. State and federal government agencies are the region’s largest employers, but there’s also a thriving technology sector.

Raleigh

Often rated as having one of the nation’s best economies, this fast-growing North Carolina city of 477,000 residents is one of the nation’s leading technology and science research hubs. Nearby is the famed Research Triangle Park, a 7,000-acre innovation center that houses more than 375 companies, including science and tech firms, government agencies and startups. Raleigh is also home North Carolina State University and a variety of business incubators.

Charleston

Founded in 1670, the South Carolina city of 153,000 people is a favorite with tourists who come for its beauty, history and Southern charm. This past April, The Wall Street Journal named Charleston as the sixth-best labor market in the country among small metro areas. The Port of Charleston, the deepest on the East Coast, is among the top 10 container ports in the U.S. The city is also home to Joint Base Charleston and a large Boeing operation.

Sources: Charleston.com, City-Data.com, City of Raleigh, Cushman & Wakefield, Data USA, Economic Development Partnership of North Carolina, Federal Reserve Bank of St. Louis, Maryland Daily Record, North Carolina State University, Research Triangle Park, St. John’s College, South Carolina Department of Commerce, South Carolina Ports Authority, Substack, The Wall Street Journal, Virginia Economic Development Partnership, Visit Annapolis, Visit Raleigh, Washington DC Economic Partnership, WFAE-FM, WJLA-TV, WorldAtlas.com

The post Commercial Spotlight: Atlantic Region appeared first on Scotsman Guide.

After seemingly endless growth to feed an unquenchable economic hunger for warehouse and distribution space, one of the strongest areas of commercial real estate throughout the COVID-19 pandemic appears to be finally hitting the proverbial wall. According to Cushman & Wakefield’s Q2 2023 national market report on the industrial sector, two years of record-setting demand and cumulative rent growth of 30% has come to an end. Industrial properties, which many had hoped would continue to prop up the troubled commercial real estate industry, are evidently reverting to the norm.

While it may not feel like it, the report points out that demand for industrial space remains historically healthy. Absorption levels in the first half of 2023 were roughly on par with the levels seen in the years leading up to the pandemic.

“If interest rates continue to stay high, I wouldn’t be surprised if 2024 actually ends up with less activity than what we’ve seen this year.”

– Lonnie Hendry Jr., head of commercial real estate and advisory services, Trepp

On the bright side, Southern markets were continuing to expand and accounted for about 61% of total absorption. Savannah, Georgia; Dallas; and Houston led the way as each absorbed more than 3 million square feet (msf) in Q2 2023. A total of 21 U.S. markets posted at least 1 msf of net growth, more evidence of strength for the sector.

Conversely, a sobering figure is that 273 msf of space was delivered during the first six months of the year, but only 116 msf was absorbed. Many more properties are on the way. The industrial construction pipeline declined by 5.1% between the first and second quarters to sit at 624 million square feet of future development, so while construction starts are falling, that’s still a lot of space set to hit the market in the next few years.

Lonnie Hendry Jr., a senior vice president and head of commercial real estate and advisory services for data provider Trepp, isn’t worried. He says the industrial slowdown is part of the natural progression of the sector as it slows from its earlier frenetic pace.

“We are just naturally plateauing from the post-pandemic highs,” Hendry says. “There’s been a lot of new supply added during the past three-plus years, most of which has been absorbed. But if you read the headlines about the sector, Amazon.com has put a pause on any new developments, and they were a primary driver for a lot of the industrial development and absorption. So, I think this is just a natural part of the cycle.”

Trepp doesn’t see anything in its data that shows the sector is in decline or merits overly negative sentiment, Hendry says. Instead, the industry is just at a cooling point. He points out that while many of the properties on hold are the large distribution centers used by Amazon and other major retailers, there is still a lot of interest in Class B warehouses in the right geographic areas where demand is growing, such as the Sun Belt states.

“I think that sector is still on fire,” Hendry says. “Good urban Class B industrial property is hard to come by, so if you have a reasonable clear height and dock-height doors or access points, those properties are still coveted in the market.”

Doug Ressler, manager of business intelligence at commercial real estate research firm Yardi Matrix, agrees that the current slowdown in the industrial sector is about normalization. He argues that there is still a lot of money going into the industrial sector that has yet to be seen in action.

“Everybody wants to put a fork in industrial and be the first ones to call its demise,” Ressler says. “They want to be the first to say, ‘I told you that it was going to heck in a handbasket.’ But really, when you look at the money going into supply chains, we still haven’t seen the money from the CHIPS and Science Act (the $52 billion legislation backed by the Biden administration to support semiconductor manufacturing in the U.S.) reach the economy yet. We haven’t seen the resupplying issue that will bring a lot of money for an improved supply chain and benefit the industrial sector. That may take three to five years.”

Recent troubles with low water levels in the Panama Canal have slowed international trade while raising the prices to import goods. Ressler says that these difficulties could mean further reshoring of industrial production to the U.S., along with rebuilding of the infrastructure for manufacturing and other areas of industrial production.

“(The U.S.) is still late in getting the reshoring effort into gear,” Ressler says. “But once that does kick in, you are going to see that the biggest recipients are the industrial companies.”

In the short term, Hendry says that the health of the industrial sector and the rest of the economy will be tied to the Federal Reserve and its fight with inflation. The industrial sector is likely to continue its cooling trend for at least the first few months of 2024.

“We just haven’t really felt the full impacts of those interest rate hikes that have taken place during the past 18 months,” he says. “If interest rates continue to stay high, I wouldn’t be surprised if 2024 actually ends up with less activity than what we’ve seen this
year.” ●

The post The slowdown for industrial is a painful shift back to the norm appeared first on Scotsman Guide.

The Dallas-Fort Worth metroplex led all U.S. markets at that time with nearly 73,000 apartment starts, equating to inventory growth of 8% in the North Texas hub. Apartment supply in San Antonio was also on pace to grow by 8%, although the number of units under construction there totaled only 17,000. In Austin, meanwhile, rental stock was set to soar by 15% as developers had broken ground on more than 45,000 units.

IPA forecast a “sharp decline in future delivery volumes beginning in 2025,” but analysts also noted that a recent cooldown in rent growth for these metros is likely to be temporary. Investors seeking opportunities in the Texas multifamily sector could be attracted by an anticipated rise in rent growth in 2024, while appreciation “above the long-term norm seems likely to return in early 2025.”

The Lone Star State’s economy is outperforming the nation as a whole. Data from the U.S. Bureau of Economic Analysis showed annualized gross domestic product growth of 3% for Texas in first-quarter 2023, compared with 2% national growth. Meanwhile, the Federal Reserve Bank of Dallas reported that the seasonally adjusted annual rate of job growth in Texas (3.2%) exceeded the U.S. average (2.2%) during the first six months of this year. Employment growth in the energy, information, construction and financial services sectors were especially strong for Texas compared to the rest of the nation.

Dallas Fed analysts also reported that the major office markets in Texas are continuing to expand. In terms of square footage under construction, Texas had three of the top 20 markets in the country as of June 2023: Austin (No. 5), Dallas (No. 8) and Houston (No. 14). Additionally, Austin ranked first among all U.S. office markets for new construction as a percentage of existing stock (6.2 million square feet, or 6.9% of current stock in June).

Although much of the growth in Texas is centered on the aforementioned metros, other portions of the Lone Star State are thriving too. In the Permian Basin region of West Texas, for instance, the populations in and around the cities of Midland and Odessa are expected to triple from 2010 to 2050. The regional economy is heavily dependent on oil and natural gas extraction, and these industries currently appear to be embracing steady growth rather than chasing the high production volumes that sparked previous boom-and-bust cycles.

Further to the west, El Paso and the surrounding Borderplex region are home to 2.5 million people, including a large bilingual workforce. The metro area accounts for 17% of all trade activity between the U.S. and Mexico, and it’s the fifth-largest manufacturing hub in North America with some 320,000 workers. ●

During the two-year period ending in June 2023, asking rents for industrial properties in the San Antonio metro area grew by 25% to reach $8.15 per square foot, Cushman & Wakefield reported. Vacancy rates, meanwhile, fluctuated quite a bit during the same time frame and nearly doubled after bottoming out at 3.9% in third-quarter 2022.

This past September, private equity firm Harbor Capital acquired a vacant distribution and manufacturing center in the southwest suburb of Von Ormy. The Class A facility encompasses 198,000 square feet and sits in close proximity to two interstate highways. And the metro area’s largest industrial sale of Q2 2023 involved a two-building portfolio totaling 648,000 square feet in northeast San Antonio.

In May 2023, the Koontz Corp. announced plans to develop a 188-acre “industrial megasite” on the city’s southwest side. The project is expected to take at least six years to be finished and involves “the largest developable infill site left in San Antonio that is receptive to industrial and manufacturing,” according to a sales and leasing partner. Last year, NorthPoint Development broke ground on a $230 million industrial park in the eastern suburb of China Grove, with the first phase reportedly set to be delivered in Q3 2023.

What the Locals Say

Austin definitely has a high profile. It’s one of those markets that continually performs. There are some issues with overbuilding, but we’re mostly on track and things are as vibrant as they’ve ever been. We’ve definitely noticed increased activity from institutional investors.

The demand for rental housing is still very strong. In terms of the banks, lenders have pulled back a little bit, but we have so many debt funds that have come out with construction money. I’m working on two multifamily construction loans right now. The biggest thing I tell borrowers is, “Let’s go to your existing banks where you have deposits and use that as value.” A lot of people don’t put as much value onto existing relationships at banks these days.

I don’t think Texas is any different than the rest of the nation in terms of what’s happening with refinancing maturing debt. We don’t have so much of a problem with the maturing notes that are on long-term fixed debt. It’s the short-term maturities — somebody who did a two- or three-year loan a couple years ago. They bought a rate cap and now they’re having to fund that again. They never thought the rates would go to 8.5% and they’re just having a little bit of sticker shock.

Sometimes they do have to come to the table with money, or we can structure some kind of creative debt stack. We’ll say, “Here’s your first lien, and we can put some preferred equity on top so we can get you out of your maturing debt and you don’t have to write a check at closing.”

3 Cities to Watch

Austin

The Texas capital continues to grow at a remarkable rate. According to 2022 census figures, Austin became the 10th-largest U.S. city with 975,000 residents and was the nation’s fastest-growing large metro area for a 12th straight year. Business Facilities recently ranked Austin as the No. 2 best business climate among large metros, an accolade propelled by the city’s life sciences and technology sectors. The office vacancy rate jumped to 25% in Q2 2023, Cushman & Wakefield reported.

Corpus Christi

This Gulf Coast city (population 317,000) is the eighth largest in Texas. Corpus Christi is the largest U.S. port for crude-oil and liquefied natural gas exports, and area community colleges are partnering with the energy sector to meet demand for skilled workers. The local naval air station directly employs 8,400 people and generates $3.3 billion per year in economic output. The USS Lexington (aka “The Blue Ghost”), a retired aircraft carrier turned museum, has resided in the city since 1992.

Lubbock

The home of Texas Tech University, Lubbock has grown by 15% since 2010 to include 263,000 residents. Along with education, the local economy is powered by agribusiness, food processing, health care and IT firms. Hundreds of millions of dollars have been invested in downtown Lubbock in recent years, including the repurposing of a former bank building to house municipal services. A private developer is building a Class A student housing complex with 730 beds that is slated to open in 2025.

Sources: Business Facilities, City of Austin, City of El Paso, Commercial Property Executive, Connect CRE, Cushman & Wakefield, Federal Reserve Bank of Dallas, Institutional Property Advisors, Lubbock Economic Development Alliance, NPR, San Antonio Express-News, Texas Comptroller of Public Accounts, Texas Demographic Center, Texas Economic Development Corp., Texas Tech University, USS Lexington Museum, World Population Review

The post Commercial Spotlight: Texas appeared first on Scotsman Guide.

California’s Inland Empire, east of Los Angeles and centered around Riverside and San Bernardino, posted negative industrial absorption of 3.9 million square feet at midyear, although only about 25,000 square feet of this total was attributable to big-box warehouses and distribution centers. It’s been 55 quarters — more than 13 years — since the Inland Empire had recorded negative absorption, as several tenants returned much of the excess space they had acquired during the post-pandemic warehousing boom.

Notably, the Inland Empire was one of two major U.S. industrial markets tracked by Colliers to log negative absorption through the first six months of 2023. The other was Cincinnati, which saw 407,126 square feet of industrial space returned to supply, due in part to a downtick in leasing and growth in bulk-space subleases.

Demand for warehousing softened substantially during the first half of 2023 as demand for e-commerce continues to decrease, according to Colliers economists. Supply chains are normalizing to pre-pandemic levels. Consider that, in 2019, there were nearly 420 million square feet of new leases, renewals and user sales for bulk industrial properties, a total that ballooned to nearly 675 million square feet last year. But activity slowed to 93.6 million square feet in Q1 2023 and to 86.5 million by midyear.

E-commerce companies, which had muscled their way to the forefront of bulk transaction market share during the depths of the pandemic, saw their share ebb further, dropping from 14.9% at the end of 2022 to 7.4% in first-half 2023. Third-party logistics firms have firmly wrested the top spot from e-commerce, growing their market share of bulk transactions from 31.4% last year to 32.9% at the end of June.

Demand for larger facilities, in particular, is on the wane. The vacancy rate for big-box facilities larger than 750,000 square feet was 2.4% at midyear 2022, but the rate has more than doubled to 5.4% in 2023. Meanwhile, the average transaction size has steadily declined over the five quarters ending in Q2 2023 after peaking at about 311,000 square feet in Q1 2022.

Still, despite many industrial and big-box fundamentals trending downward (and headwinds like increased capital costs still lingering), the industrial sector is well positioned for the short term, according to Colliers.

“Demand remains strong for big-box facilities nationwide,” said Stephanie Rodriguez, national director of industrial services for Colliers. “As occupiers look to modernize their facilities and become more operationally efficient, there will be continued demand for this type of product.

“While e-commerce appears to be stabilizing after rapid growth since 2020, many users are still in need of space to accommodate the demand on their networks. It appears that this trend will continue in the near future.”

The post Nation’s largest industrial market sees negative absorption for first time in 13 years appeared first on Scotsman Guide.

Furthermore, net absorption for both property subtypes has plummeted since mid-2022. The question now being asked is, where do we go from here? Mortgage lenders and borrowers are looking to determine whether the sector is simply regressing toward a new equilibrium after a positive demand shock, or if there is significant stress forthcoming for this highly favored asset class.

Before we dig into the Moody’s Analytics outlook for the sector as a whole, one interesting development of note is the divergent net-absorption paths within the industrial subtypes. As mentioned, declining lease activity has been observed for both warehouse and flex spaces in recent quarters, but the latter category is facing a much stiffer test of its resilience in today’s market.

Since mid-2022, the level of occupied square footage for flex and R&D spaces has actually declined for the nation as a whole. As the chart on this page shows, it’s true that occupied stock is still above the level recorded at the start of 2022, but a period of nearly a year without any net expansion of space usage is worrisome. As for warehouse and distribution space, it is clearer that there is a moderation in the pace of growth, rather than the growth hitting a wall.

The rationale for the divergence in fortunes stems from the nuances within the subtype uses and their relationships with the national and global economies. Flex and R&D space often has elements of the office sector (and even light manufacturing). With changes to the workplace related to hybrid and remote policies, owners of flex spaces are — and likely will continue — feeling at least some of the pain of their more specifically tailored office-space counterparts.

On the manufacturing front, the past year has been a tough one for this economic sector as a whole.  Various measurements of manufacturing activity and sentiment have been pointing toward a less-than-favorable environment. After a period of rapid growth in 2021 and early 2022, a combination of headwinds has brought current and future space needs into question for flex and R&D spaces.

In contrast, the tailwinds for the warehouse and distribution sector are considerably stronger and much less uncertain than those of the flex segment. E-commerce continues to grow. Meanwhile, accelerated migratory patterns, as well as fixes to the logistics network weaknesses that were exposed early in the COVID-19 pandemic, promote greater confidence in this subsector for lenders, developers and investors.

As for a more specific outlook for the industrial sector, Moody’s maintains a positive view for this property type. Warehouse and distribution spaces should continue their upward trajectory, while the flex/R&D segment is expected to regain its footing. A new and higher growth path has been established as companies reshore or nearshore their manufacturing activities, which will lessen supply chain pressures over the long term and allow the growth of e-commerce to endure.

Lofty construction expenses for manufacturing facilities are serving as a leading indicator of this path. Additionally, innovative shipping methods and the push to ship many goods in less time requires a larger and more spread-out footprint of warehouse and distribution facilities. The construction pipeline indicates that many of the projects started during the height of growth in this sector will come online in 2023, meaning that new supply will likely exceed net absorption for the first time in several years.

Nonetheless, relatively constant vacancy rates in the 4% to 5% range are poised to keep effective rent growth rates in the region of 6% per year. This is still well above the historic yearly averages prior to 2020. ●

The post The industrial-sector forecast calls for stabilized growth appeared first on Scotsman Guide.