Lazard on the continued appetite for industrial assets

Amid rising uncertainty, institutional investors are moving towards defensive sectors like industrial, according to James Jacobs, head of real estate for Lazard’s private capital advisory group.

James Jacobs

Institutional appetite for select industrial and residential strategies increased during September as investors favored resilient sectors with healthy occupier demand. Amid ongoing uncertainty – including rising inflation, rate hikes and equity market volatility – capital is increasingly tending toward areas of the market experiencing relative stability and/or growth as the final quarter of 2022 approaches. Despite the unpredictability of capital markets and the challenges around valuation, pockets of the industrial sector, in particular, continue to display positive operating fundamentals within the occupier market.

The rise in institutional appetite for industrial over the past few months is being driven by several factors. These include record net absorption despite rising rents, and, in many markets, steady occupier demand relative to continued undersupply. E-commerce continues to underpin the sector, and the latest figures from research and advisory firm Green Street suggest that by 2030, 30 percent of all retail sales in the US will be online. Such growth will require significantly more warehouse space than traditional brick-and-mortar retail sales.

In the current environment, geopolitical unease and prolonged supply-chain complications are driving corporations to stockpile inventory levels to meet near-term demand. Onshoring, or nearshoring, is being widely adopted as ‘just-in-time’ delivery becomes more unreliable across global channels. There is also an increase in alternative users of industrial assets, including content creation and film studios, dark kitchens and indoor farming. Additionally, e-commerce demand today is driven by altered consumption patterns and a greater degree of flexibility and responsiveness required from online retailers. 

Current appetite for the industrial sector is targeted toward multi-let urban infill assets. These assets feature a wider diversification of tenant bases, shorter leases – typically under five years – stable cashflows, and a broad spectrum of end users. Generally, these assets are seeing low – less than 3 percent – vacancy rates across key markets, continued rental growth, slower zoning to ease undersupply, and record take-up as seen in the first half of the year.

Notwithstanding increased interest in demand for urban infill industrial, some of the key differentiators to drive rents and cashflows will continue to be proper asset-selection, a defensive tenant mix, and leasing expertise. It will be important for investors looking to deploy capital to align with specialists that have expertise in navigating the sector through market cycles.