A Compelling Opportunity
The industrial asset class continues to be an investor favorite due to historic income growth over the last several years, generated by record low vacancy and substantial demand. The Midwest is a compelling opportunity for investors as the region benefits from a comparatively low cost-of-entry while also having stable, economically diverse industrial markets that help protect investor income streams – especially during times of economic uncertainty.
Why Midwest Industrial?
- Since the pandemic, the industrial sector has experienced exponential growth in tenant demand which drove rental rates to record highs, creating tremendous value for investors. Industrial assets continue to outpace other traditional and alternative investment classes, providing a superior return over a 5-, 7- or 10-year horizon. For example, if invested in Q4 2017, and held throughout the prevailing price reset, cumulative total returns over a 10-year horizon will be upwards of 180% - outstripping comparative property types and other asset classes.
- The Midwest contains highly stable, diversified economies that support comparatively stable fundamental conditions which can benefit investors. According to Moody's Analytics’ Industrial Diversity Index, all major Midwest markets are on the top 25 most diversified metros list and three are within the top five.
- The Midwest region has much less construction relative to others, insulating investors from vacancy movements and providing a protective layer for income. In the Midwest, forecasted vacancy is expected to increase by 60 to 70 basis points (bps) below projections across other regions.
- Dry powder, a measure of unallocated capital, remains near an all-time high, totaling over $258B in North America as of year-end 2023. As some investors await clarity on market conditions in the challenging capital markets environment, opportunity to compete on deals has expanded to a broader set of investors.
- A strong manufacturing presence across the Midwestern Rust Belt markets attracts considerable investment from innovative industries such as battery and electric vehicle manufacturing. This dynamic generates increased activity across complimentary industrial uses, including parts suppliers, which in turn stimulates leasing demand across manufacturing and logistics-related properties.
Industrial assets outperformance of other CRE property types and non-CRE asset classes are expected to continue
Investment into industrial assets will continue to outpace both traditional investment vehicles and the standard commercial real estate asset classes due to strong market fundamentals such as low vacancy, strong rent growth and tenant demand. As a result of this strong performance over the last several years and over the next 5-year horizon, an Industrial asset purchased in Q4 2017 is positioned to outperform other property types and sectors. These comparatively strong returns are still expected despite the prevailing valuation reset period. The S&P 500 emerges as the next highest asset class from a cumulative return perspective, behind Industrial, and anticipated returns are still 80 bps below that of Industrial real estate.
Relative Cumulative Forward Total Returns if Invested in Q4 2017
Source: NCREIF, Various, Cushman & Wakefield Research. All types cap rate calculated for four main property types using weights based on capital investment share from 2018-2022. For each horizon, the sell dates are: 5-year = 22Q4, 7-year = 24Q4, 10-year = 27Q4.
| "INDUSTRIAL INVESTMENTS MADE AT THE END OF 2017 ARE EXPECTED TO POST CUMULATIVE RETURNS UPWARDS OF 180% OVER A 10-YEAR INVESTMENT HORIZON. THIS PROFILE OF OUTPERFORMANCE IS EXPECTED TO BE MAINTAINED IN CURRENT VINTAGES. ASSUMING FORECASTED DEMAND AND INTEREST RATE CONDITIONS COME TO BEAR, THERE EXISTS A NON-TRIVIAL OPPORTUNITY TO CAPTURE ADDITIONAL INCOME RETURN GROWTH AND RELATIVE PRICE APPRECIATION." –REBECCA ROCKEY, DEPUTY CHIEF ECONOMIST & GLOBAL HEAD OF FORECASTING |
Taking Advantage
NO SHORTAGE OF CAPITAL
Sidelined capital remains near the all-time high at over $258B in North America.
In light of economic uncertainties, some investors have taken their foot off the gas pedal in hopes of more price discovery. This dynamic has created an opportunity for private capital sources to ramp up investment through a cycle while many institutional investors remain cautious.
North America Dry Powder
MIDWEST MARKET ADVANTAGE
The Midwest has less vacancy risk as a result of comparatively smaller construction pipelines. Forecasts suggest that while the Midwest will see an uptick in vacancy, the increase is expected to be 60-70 bps less than what is projected across other regions. Tighter market conditions provide income stability for investors as competitive availabilities have less impact on underlying rent fundamentals.
