But office is still rebounding.
That super hot industrial market? Brokers are losing confidence and seeing strain, according to the first quarter sentiment report from the Society of Industrial and Office Realtors. Office, though, is still on the rebound.
The industrial sector might seem an odd subject for a loss of confidence. The sector has led CRE through the pandemic, scoring top marks time after time and continuing to crush cap rates. But nothing can go on forever.
“The red-hot industrial market is starting to see the effects of high demand and lack of space catching up with each other,” the report stated. “This strain caused by limited supply caused confidence in the industrial sector to drop for the first time in sentiment reporting.”
On-schedule industrial transactions had been increasing for almost a year. That changed in the first quarter of 2022 as they fell by 3%. On-hold transactions were up by 10% and cancelled transactions went from 4% to 6%. A “lack of space seems to have caught up to the industrial sector, which saw a 25% decrease in leasing activity in Q1. Only 61% of industrial SIORs reported high leasing activity, compared to 81% in Q4 2021.” It was the lowest leasing activity in over a year and 93% of respondents said vacancy was lower than a year before.
If you’re a broker, you need property to lease and sell. Without it, there’s little you can do other than perhaps donning a hard hat and heading to a construction site.
There’s been other growing evidence that areas of real estate were pressing the bounds. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. Similarly, according to the 2022 RCM Lightbox Investor Sentiment Report, another star, multifamily, is facing headwinds this year. And while there’s some room for cap rates to fall more with additional upward pressure on prices, as First American Financial Corporation notes, things have been getting closer to modeled cap rate bottoms.
An example of land shortages is the almost completely lack of industrial space left in California’s Inland Empire. Finding inland locations has become increasingly difficult.
When it comes to office, however, respondents reported higher confidence in market conditions, vacancy and subleasing dropping significantly, and improvement in transactions. There was a “10% rise in on-schedule deals in Q1, with 76% remaining on schedule,” which was a 26% over the same time last year.