There’s no question that the industrial and logistics market has gone through a period of recalibration this year following the increased cost of borrowing in several major investor markets, together with the economic uncertainty that has developed during the course of this year.
Transaction volumes declined, yields moved out, and our research suggests that pricing agreed prior to interest rate increases was often ‘chipped’ in the range of 5 to 30 bps. Additionally, several opportunities priced before the interest rate increases were withdrawn from the market, with a view to being relaunched when more stable conditions begin to return. In short, there has been a concern across the sector, despite the good underlying fundamentals it has to offer.
Interestingly, the same research found that pricing corrections in whatever form have occurred across all major asset classes, with the scale and volume being broadly similar and for the same reasons. There has been much less commentary and discussion in other asset classes compared to industrial and logistics though. Perhaps it has just felt more dramatic in a sector at an all-time high with confidence otherwise booming which has been renowned historically as a somewhat less exciting sector with relative stability and benign rental growth.
Nevertheless, activity over the past three months with the subsisting supply and demand imbalance and structural shift propping up this sector has demonstrated that this market has been quick to find a new equilibrium.
We are now seeing transactions being completed at a much more consistent level, broadly similar to quoted prices – perhaps suggesting pricing corrections are starting to diminish where there is no sound underlying reason to warrant any reduction. Both vendors and their trusted agents are more familiar with the new minimum returns required to cover the cost of capital resulting in more realistic pricing expectations.
It has also helped that during this period of turbulence, the occupational market has continued to perform well, with low vacancy and positive rental growth against a backdrop of tight land supply for new development stock. As such, there continues to be a sizeable supply-demand imbalance across most areas of the industrial market.
All things considered, it is encouraging to see how the industrial and logistics market is capable of recalibrating itself in a relatively short period of time. Moving forward, we expect to see the investment market for this sector steadily improve from its current and rebased level, and this new stability should once again offer investors renewed confidence.
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