Global industrial: out of the shed and into the spotlight

Global industrial and logistics property recorded a great 2015. What are the sector's key themes for 2016 and beyond? 

5th April 2016

Continue to the other two articles in this edition of the Global Outlook:

Markets calming but cyclical headwinds strengthening. 

While our best guess is that the global economy will record another moderate expansion in 2016, the downside risks have increased. Graham Parry, Group Research Director, explains. Click here to read more. 

Where next for global real estate markets?

Global real estate returns have been recovering for the last six years. Have they now passed their peak? Cynthia Parpa, Director, Research and Analysis, Global, shares her views. Click here to read more. 

How did global industrial and logistics property fare in 2015?
2015 was another fantastic year for industrial and logistics real estate globally. Total investment into the sector ended at USD 102.8 bn, the highest level since the crisis and just shy of the USD 104.7 bn in 2007. Heavy investment inflows have put downward pressure on cap rates. In nearly every major market, industrial and logistics cap rates are at or near their pre-crisis lows. Still, with interest rates also at record lows, cap rate spreads over the risk-free rate remain wide. The sector continues to deliver positive total returns globally, although they are starting to slow in market in more mature stages of the cycle, such as the US and the UK. In those markets, there is less scope for further yield compression and total returns will need to be driven by rental growth going forward, which we are starting to see. Nonetheless, with yields so low, rental growth will need to be especially strong to offset the adverse impact on returns when yields do begin to rise.
What are the major themes in the industrial and logistics market in 2016?
We have identified two major themes that we believe will be major talking points in industrial and logistics real estate in 2016. First, this year will see the completion of the expansion of the Panama Canal, a project ten years in the making. The project will allow for deeper, wider “post-Panamax” shipping vessels to pass through the Panama Canal for the first time. We expect the expansion to redirect trade from US West Coast ports — which currently receive a disproportionate amount of container inflows (two-thirds of East Asian container traffic) relative to how close they are to major population centres — to US East Coast ports nearer to densely populated conurbations. The expansion should boost prospects for industrial and logistics properties near major East Coast ports. The second prevailing theme is “industrial replaced by residential”. Buoyant demand for upscale residential property near city centres has propelled the redevelopment of older industrial and logistics sites into residential units in major cities globally. At the same time, industrial and logistics tenant demand for urban units is higher than ever, given the ongoing growth in online shopping and same-day delivery services. These two forces are creating significant opportunities in the urban industrial and logistics space, with infill sites and new development activity providing space for displaced operators.
How do you expect the sector to evolve going forward?
We expect the sector to continue its evolution into an institutional real estate submarket alongside more traditional submarkets such as office and retail. The yield spread — interpreted here as a measure of relative risk — between UK industrial and UK retail was as high as 500 bps in the late 1980s but has consistently fallen since then and currently stands at around 50 bps. It is a similar story for industrial versus offices. This is consistent with the institutionalisation of the asset class and its integration with retail as a part of the modern distribution and consumption network. We expect the yield gap between the asset classes to continue to narrow. Indeed, industrial yields could fall below retail yields if digital retailing and direct-to-consumer distribution materially displaces in-store retailing as the main shopping format.

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