As investors examine how global market volatility impacts commercial real estate, one thing remains clear: REITs are back in the limelight with increased returns year-over-year. In fact, the all-equity REIT index shows returns of 12.3 percent through the third quarter and JLL’s Q3 U.S. Investment Outlook confirms that two sectors are leading those returns: industrial and retail.
The industrial and retail sectors outperformed other sectors with 31.1 and 13.1 percent returns through the third quarter respectively compared with 6.1 percent in the S&P. Improvements across the sectors in tandem is not a surprise when considering the impact of e-commerce and evolving traditional retailer strategies. But while these sectors have different dynamics, they also have several common investment themes.
Investors look to new markets for core product
The industrial sector is on pace to see its second -largest year since 2008 in terms of volume. While the types of deals that drive the industrial market have ebbed and flowed–single assets, mega portfolios, single-market portfolios, etc.–there has been one constant: Investors continue to have a big appetite for Class A product.
And that product isn’t necessarily located in primary markets. For instance, Phoenix led the way in total industrial space transacted for assets over 200,000 square feet in the third quarter as volume reached four million square feet in industrial assets.
“We see broad rental growth across nearly every market as vacancy reaches an all-time low,” said Craig Meyer, President, Industrial Brokerage and Industrial Capital Markets, Americas. “Institutional investors continue to view industrial real estate assets as highly-desirable investment targets.”
That broad rental growth has prompted investors to look not only at primary markets such as Inland Empire, California and Central Pennsylvania, but also to secondary markets like Phoenix and Indianapolis.
In the retail sector, investors are still willing to pay a premium for extremely high quality product in primary markets, but secondary markets like Las Vegas have also seen cap rate compression.
In the retail sector, investors are still willing to pay a premium for high-quality product in primary markets, but secondary markets like Las Vegas have also seen cap rate compression.
“Institutions have really pivoted toward investing in only the best assets when it comes to secondary markets,” said JLL Managing Director Chris Angelone. “This is causing some cap rate compression, especially as volumes overall remain depressed and Class B or C assets with higher cap rates aren’t trading as much.”
For example, secondary market mall volumes increased more than 510 percent quarter-over-quarter mostly driven by large, Class A single asset deals, according to JLL research.
“REITs are finding success in these secondary markets, specifically with secondary core product, which has seen a considerable amount of volume,” said Angelone.
Added Meyer, “As market fundamentals continue to improve, institutional capital will continue to pursue high-grade, long-term leased industrial assets. We expect 2017 to be another exceptional year for everything from single industrial asset trades to regional and national portfolios.”