The state of the industrial market remains relatively strong. Industrial valuations remain at or near their peak on a dollars per-square-foot basis. Over 30% rent increases remain common as legacy leases roll over. Vacant buildings are selling for record prices. Our clients tend to serve tenants in under 75,000 SF spaces. There is effectively no vacancy in this size range, allowing landlords to dictate lease terms.
Cap rates in the private market space are beginning to shift higher. 8% cap rates are available for B/C Class buildings in secondary markets. These are properties that would have commanded low/mid-seven cap valuations earlier in the year. This adjustment primarily relates to higher borrowing costs, necessitating higher cap rates for buyers to achieve adequate leverage. Buyers are also comfortable leaving money in high-yield bank accounts currently yielding over five percent. This is a very different dynamic than last year when investors endured near zero percent rates at their bank and could reasonably obtain 8-10% cash on cash yields in office/industrial properties.
Our concerns regarding the leasing market continue to grow. While demand continues to outpace supply, our conversations with leasing brokers indicate tenants are gaining power. Landlords should be prepared to spend money on tenant improvements in order to keep spaces full. Negotiating with existing tenants at marginally below-market rents may be prudent. The market for 200K+ SF spaces has slowed. This is a different tenant group with different drivers than the smaller tenants. That said, owners of any sized building need to be prepared for more expensive vacancies than they may have grown used to over the past few years. Vacancy difficulties may also create buying opportunities. Historically, expensive lease-up projects have motivated legacy owners to sell.
Debt remains available for quality sponsors across most asset classes, including office. Middle-market industrial buildings are commanding LTVs in the 60-75% range with rates in the 6.0-6.75% range. Office buildings are still financeable at lower LTVs, typically with personal guarantees.
The Klein Group closed four transactions in the second quarter, two of which set price records. 215 Plain, a 48K SF small bay facility, traded at a 6.70 cap and $148/SF. 19 Star, in Merrimack, NH sold for $126/SF to a contractor who will occupy a third of the property. We remain on track to surpass our 2022 results despite the Federal Reserve’s attempts to slow activity.
If you are looking to find your next investment or are considering selling your property, please contact me at (305) 401-4549.
Click the link below to read the full report.
https://marcusandmillichap.box.com/s/6x964ou3mqbmevvr7mi0a8407j5q4ap6
