1st Quarter 2013 Hotline
Southern Industrial Development
by Joe A. Hollingsworth, Jr.
Necks that are stuck out sometimes get chopped off. Well, as I mentioned in my last couple of hotline articles, we were predicting a Romney victory with a 5% GDP growth starting in March 2013. The “thud” you heard was from the guillotine hitting my head. As the water cooler jokes around my office indicate, thank goodness we are much better at spotting industrial real estate trends than we are political trends. The question is: “Where do we go from here with industrial real estate?”
Our sense is with the President’s re-election the maximum GDP growth will stay at 1.75% to 2.50% for the next four years. Those of us that positioned our properties aggressively with shorter term leases with renewals that are subject to current market rates are in a weakened position from what we had hoped. The market rates will not go up as much as a faster growing economy would have dictated. Those of us that have invested defensively (i.e. long term leases with locked-in specified rates) will see these assets continue to be very popular. With a slower growth economy over the next four years, there will remain very little speculative building proportionately. As a result, existing properties will experience cap rate compression. A few lenders are becoming more aggressive on lending as the real estate side of their balance sheets has deteriorated.
The reasons we believe we should remain a selective buyer over the next couple of years is due to 8% to 10% cap rate return and interest rates in the 3.0% to 4.0% range producing a good yield play. Furthermore, with pricing on “interest rate caps” being as reasonable as they are, you can obtain rate protection cheaply for several years.
While yield and rate protection is one thing, there are other opportunity drivers such as:
1) An economy with an ever-increasing velocity of domestic and international trade has to have more space every year for manufacturing and logistics;
2) The tremendous energy cost savings that are occurring due to the natural gas price dropping will continue to be a “boom” for keeping and creating manufacturing jobs in the United States; and,
3) The vast on-shoring of jobs that the nation as a whole, but more particularly the “right to work” South is experiencing, will give industrial real estate a lot of strong support for several years to come. Thus, we believe this is an ideal time to buy for medium to long-term holders.