Many multi-use industrial properties are now in the heart of population centers, and limited supply has made them a prime target for investors.
Multi-use industrial product is a new favorite among industrial investors. A new report from JLL delves into the trend, noting that location and limited supply has made these properties an ideal investment opportunity.
The JLL report defines multi-use industrial as a multi-tenant industrial property ranging in size from 20,000 to 100,000 square feet with a wide ranging of uses, from distribution and warehouse to shallow/small bay, flex industrial, research and development and even high-office finish flex. These properties were typically built on the fringe of urban communities, but with urban expansion, many are now “engulfed,” as the report describes, in population centers. This has made them a perfect asset for supply chain networks, according to the report.
Location isn’t the only benefit. Multi-use industrial product is in limited supply. New industrial construction has focused on state-of-the-art industrial product targeting e-commerce users. Multi-use industrial, on the other hand, has seen little new construction activity. As a result, multi-use industrial makes up only 15% of the total industrial inventory in the US. By comparison, single-tenant properties make up 62% of total inventory and multi-tenant properties account for more than 22% of total inventory.
The limited supply has driven record low vacancy rates for this market segment, in turn putting upward pressure on rents. Nationally, multi-use industrial has a 6.7% vacancy rate, only 120 basis points higher than the total industrial vacancy for US industrial product. Single-tenant industrial has a 4% vacancy rate, while multi-tenant vacancy rate trends above 12%.
The downward trend in multi-use industrial vacancy has produced strong rent growth, trending above the national industrial rent growth. From 2010 to 2020, multi-use industrial rents increased 54.3%, while overall industrial rents nationally grew 41.8%. In 2020, multi-use industrial rents grew to $8.87 per square foot, up from $8.45 per square foot in 2019. The JLL report expects rents for this product to continue to grow through 2024.
Despite the attention and attractive story around multi-use industrial, cap rates actually increased in 2020 amid cap rate compression in the remainder of the industrial market. Cap rates for multi-use industrial properties trended 219 basis points wider than institutional grade properties and 124 basis points wider than US industrial cap rates.
Multi-use industrial is also perfect for investors skeptical of the highly popular and pricey class-A industrial product. In a recent interview with GlobeSt.com, Jonathan Needell, president and chief investment officer of KIMC, said that high price tags are worthy of top tier tenants, like Amazon, but other tenant profiles won’t warrant the high price tags. As a result, the firm has focused on unique infill product and logistics uses near population centers, which also see strong demand but offer better returns compared to the big box product.