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Investor demand rises for industrial real estate

As the property sector rebounds, industrial assets are sparking renewed interest from real estate investors, according to a new survey by accounting and consulting firm PwC.

Although many investors remain focused on multifamily properties, demand for US industrial assets is picking up among real estate buyers as the sector continues to show signs of recovery, according to the latest PwC Real Estate Investor Survey.

One key reason for investor interest in industrial assets is the projections for rent growth in the sector. In addition to a limited amount of new supply, potential rental growth is being driven by steady tenant demand, which surged last year and is expected to remain strong in the coming months. Investor optimism on warehouse space is largely the result of an improving US employment market, which will generate greater consumer spending and consumption of goods – hence more demand for industrial space.

With tenant demand rising, particularly in coastal markets with international ports, some survey participants reported less of a need to provide free rent, as well as a decline in the amount of free rent given. By contrast, some industrial owners were granting tenants as much as one year of free rent on a 10-year lease just one year ago. Overall, rent growth assumptions for the US warehouse market have grown by nearly 235 basis points over the past two years, according to the survey.

Still, the expected industrial real estate recovery has lost some momentum as a result of the European recession, which has slowed exports, and an anaemic US economic recovery. In fact, half of the overall US industrial market will remain in the recession stage of the real estate cycle, 37 percent in recovery and 13 percent in expansion by the end of 2012. Two markets already in recovery are the Austin and the San Jose-Silicon Valley markets, where energy and high-tech industries are helping to promote job gains, leasing demand and rent growth. PwC projected that all of the US industrial real estate supply either will be in expansion or recovery by 2015.

One challenge to the resurgence of investment activity in US industrial real estate, however, is the recent uptick in speculative and build-to-suit construction in some markets. An overabundance of new supply could threaten the sector’s recovery, which in turn could hurt investment expectations and interest from buyers in the near term, the survey said.

Furthermore, the release of the PwC survey follows several significant private equity real estate transactions targeting industrial real estate in recent months. Just last week, Brookfield Asset Management launched a $1 billion industrial venture with Dallas-based real estate investor and developer Hillwood to acquire, build and manage large value-added warehouses in the US. Earlier this year, Oaktree Capital Management purchased a majority stake in a portfolio of 26 US industrial properties.