America's Property Tax Advisor

Industrial Markets May Moderate

BY SCOTT DONALD, CMI, IRVINE, MARCH 2022

While industrial real estate performance is expected to remain strong in the near term, longer-term prospects are more uncertain. After unprecedented physical expansion during the pandemic, some major players are pulling back. The uncertainty in the market will create challenges for assessing warehouse properties.

 

Following Amazon’s Lead

 

Executives at Amazon say the company’s warehouse leasing, buying, and building may start tapering off.

 

The company’s network has doubled in size since 2020 with $25.4 billion in leased property and equipment, and another $5.62 billion in build-to-suit development.

 

Amazon CFO Brian Olsavsky told CoStar News that in the recent past, approximately 30% of the company’s earnings have gone to building warehouses. While spending on internet infrastructure and transportation will continue at a high level, the warehouse building boom will not, Olsavsky said.

 

Pricing Slows

 

The U.S. Industrial Index advanced just 1.1% in the fourth quarter, its slowest quarterly gain in 16 quarters. Investment gravitated toward smaller markets with typically lower costs.

 

“Strong fundamentals have been a boom for investors in this property sector, but price appreciation slowed in the second half of 2021,” explained CoStar’s Christine Cooper.

 

Interest rate bumps are inevitable this year and that will further impact their worth and thus development.

 

Looking Ahead

 

The near- to medium-term prospects for warehouse properties are solidly positive. However, looking further ahead, there’s uncertainty surrounding the industrial sector, according to a report by Oxford Economics.

 

As advancements in automation are integrated into warehouse operations, efficiencies will reduce the aggregate demand for industrial real estate in the future.

 

A continued focus on new, high-specification facilities will result in increased capital expenditures by owners and will potentially lead to greater obsolescence and depreciation risks. These risks will be important to mitigate to control escalating warehouse property tax assessments.