The already hot industrial real estate sector is burning up with demand that's so fierce investors increasingly are competing to buy warehouses before they are built or leased.
Traditionally, investors were loath to take on development and leasing risk, preferring to buy warehouses when completed and with tenants in place. But industrial rents are rising quickly — with first-year comparable rents up 10.8% in 2021 from a year earlier, according to CBRE research — and consistent growth in leasing rates is causing investors to be less concerned with those risks.
According to MSCI Inc.'s RCA Commercial Property Price Indices, industrial prices rose a record 28.1% in the 12 months ended Jan. 31. That's faster than the growth in any other property sector in the period, besting apartments' 22.5% increase.
Real estate executives say the industrial properties segment still has room to grow.
"If you take any kind of view of the world that there could be reversion to the mean, it points to a peak," said Richard Kleinman, Chicago-based head of LaSalle Investment Management's U.S. research and strategy group and co-CIO for the Americas. But investors expect rents to continue to rise and, so far, they have been right because supply has lagged demand, Mr. Kleinman said.
LaSalle has $76.6 billion in assets under management.
While the industrial real estate market is certainly heated, "it doesn't scream to us that it is overheated," he said.
Still, there are caution signs on the horizon, including uncertainty around whether rising interest rates will slow transaction activity and impact pricing across real estate sectors. What's more, rising costs of building materials, fuel and labor as well as slower delivery times of needed construction materials could also cut into returns.