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  • Writer's pictureRealFacts Editorial Team

'Somebody Lit A Fire': Interest Rate Stability Reignites Industrial Deal Flow

Industrial area

After prolonged caution and hesitancy, the industrial real estate sector is witnessing a resurgence in investment activity. The catalyst? Interest rates have finally stabilized, rekindling the enthusiasm of investors previously sidelined by volatility.

Interest Rate Stability Brings Investors Back

Despite interest rates hovering at a two-decade high of around 5.3%, their newfound stability has provided the clarity investors needed to re-enter the market. As Pauli Kerr, director of capital markets at JLL’s Dallas office, noted, “A lot of groups, with the interest rate volatility and uncertainty, were sitting on the sidelines, not wanting to go make a bad bet or a bad play. Whether it’s good or bad, with stability, groups understand where to price deals.”

Surge in Industrial Loan Volume

This sense of stability has translated into a remarkable 63% increase in industrial loan volume during the first quarter, a surge predominantly driven by $7.5 billion in CMBS refinancing activity by Blackstone-affiliated borrowers. This starkly contrasts with the broader lending landscape, where volumes across most other assets have declined, stymied by persistently high interest rates and shaky fundamentals.

Resilience of Industrial Real Estate

Industrial real estate, however, has proven its resilience. Since the Federal Reserve began its monetary tightening campaign, the sector has maintained steady rent growth and leasing demand. Jack Fraker, president and global head of industrial and logistics at Newmark, emphasized this robustness, noting that industrial was the only sector to appreciate from mid-2023 to early 2024 despite elevated debt costs.

Consumer Spending Boosts Confidence

Consumer spending on goods has also seen an uptick, further boosting confidence in the sector’s profitability. Fraker described the renewed investor interest vividly: “A lightbulb went off over the heads of these investors, somebody lit a fire, and they all started to get back into the game immediately. All the best and brightest institutional investors are trying to buy industrial right now.”

Significant Sales and Development Activity

Prologis, a prominent player in the sector, has announced plans to raise between $800 million and $1.2 billion through industrial property sales this year. Additionally, the company intends to break ground on new developments worth between $3 billion and $3.5 billion. Even Amazon is getting back into the game, after a period of scaled-back expansion. The e-commerce giant has leased, bought, or announced plans for more than 16 million square feet of new warehouse space in the U.S. this year alone.

Rising Prices and Rent

This heightened activity is pushing prices up across the industrial market. During the first four months of the year, industrial sales reached $15 billion, with the average property trading at $146 per square foot. National in-place rents climbed to an average of $7.96 per square foot in April, marking a 7.4% year-over-year increase.

“Acquisition groups want more deal flow to look at because they are competing against, in certain deals, 15-plus groups on one opportunity,” Kerr said. “Because of that, these sellers are seeing really good pricing.”

Optimism from Federal Reserve Signals

The Federal Reserve’s indication that the era of interest rate hikes is over has further fueled investor optimism. A March CBRE survey suggested that cap rates might be nearing their peak, prompting investors to seize the moment. “They wanted cap rates to go higher and higher so they could get better deals,” Fraker said. “When the Fed signaled they were not going to increase the 10-year rate, all these investors out there finally realized it was time to buy.”

Alternative Lending Sources Step Up

Alternative lending sources are stepping up as big and regional banks remain cautious. The CMBS market, in particular, is thriving, with industrial lending up 93% in Q1. This surge in refinancing activity is driven by $156 billion in maturing loans. While sale prices are trending up, many owners are opting to recapitalize, hoping for even better terms in the future.

“If you think next year we will be in a better environment both geopolitically and interest rate-wise, you’re seeing groups want to hold on to assets and wait for a better day,” Kerr explained.

Challenges and Rewards for ICP Funds

For firms like ICP Funds, navigating the current landscape remains challenging but rewarding. “Even though our rhythm of purchasing and closings has kept up, it’s been a harder slog for us,” said Agustín Barrios Gómez, founding partner of ICP Funds. The firm, which focuses primarily on industrial investments, continues to raise capital at a steady pace, with investors willing to endure short-term losses for long-term gains.

Strong Fundamentals Drive Growth

“Every other asset class cannot say they have this much rental rate growth going on. Ours can, and ours does,” Fraker said. “Of all the asset classes, this is the one that has a lot of legs behind it because the fundamentals are so strong, and they keep getting stronger.”

As the industrial real estate sector powers ahead, buoyed by stable interest rates and robust fundamentals, the future looks bright for investors ready to capitalize on these dynamic market conditions.


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