The State of the CREdit Union

As investors and lenders vie to connect and place bets on warehouse and infill last-mile distribution space, ongoing low-interest rates, cheap debt, and red-hot demand will continue to keep the industrial sector center-stage in the second half of 2021. Similarly, the story for office is expected to remain a patient exercise for both owners and capital of wait-and-see.

Rick Ellison, SIOR, vice chairman, Cushman & Wakefield based in Irvine, Calif., shared that cap rates on Southern California industrial are compressing. This is the result of more capital being allocated toward industrial as well as more capital overall than opportunities. Simultaneously, rental rates are climbing because of a huge influx of tenants driven by e-commerce. On the flip side, industrial will find it difficult to secure entitlements as a result of communities not wanting trucks without jobs.

While spec development is in play, a lot of Southern California is mature. This leads to new development opportunities being focused on the infill markets of Los Angeles, with Orange County seeing redevelopment or tearing down inventory and building new. The tight market has served to preserve values.

“We're seeing such inflation of industrial values, and of course, office values have declined because of COVID, that there are some strategic opportunities where we're actually converting office buildings [for industrial use],” Ellison says. In early June 2020, Cushman & Wakefield advised on the sale of four office buildings totaling 221,921 square feet on approximately 13 acres in Orange County, Calif. The portfolio was sold in two separate transactions to the joint venture of Western Realco and RREEF, which acquired the sites on a land basis with the intent to redevelop them into new high-end industrial use.

Because there’s so much capital chasing industrial deals in SoCal, deals are closing in all-cash and debt is put on post-close once the property has stabilized. The sheer availability of debt is helping to drive cap rates down. “We're seeing multiple offers on every asset that we bring to market, anywhere between 10 and upwards as high as 25 offers depending on the wide appeal of the opportunity,” he says.

Because the market is moving so fast, most in-place leases are below market so the lender will look at marking that to market and see how that looks from a debt coverage ratio standpoint, Ellis explains. As for the remainder of 2021: “We think it's going to continue to be a red-hot market with all-cash buyers, and a lot of capital available to do it.”

Read the full article in the Fall 2021 issue of SIOR Report, available now!