The increased costs of property financing are expected to cause industrial capitalization rates to rise.
In this post, we talk about the causes driving this trend and explain what it means for owners and buyers of industrial properties.
Rising Interest Rates Expected To Push Industrial Cap Rates Higher
The increased cost of borrowing money is expected to have an impact on industrial cap rates, which may be pushed higher over the next few months.
The Federal Reserve has enacted record hikes in borrowing rates in an attempt to curb inflation and seems ready to make another three-quarter-point interest rate increase later this month, according to the New York Times.
Despite these challenges, the effects on industrial property sales pricing have been minimal so far and investors continue to be bullish on the industrial sector, which may be an indicator that a collapse in property prices is unlikely in the short to medium term.
In fact, industrial property leasing and rent have shown remarkable levels of resiliency throughout the pandemic, bolstered by the explosion of e-commerce.
According to the U.S. Census Bureau’s Annual Retail Trade Survey (ARTS), e-commerce sales increased by $244.2 billion in 2020, the first year of the pandemic, rising from $571.2 billion in 2019 to $815.4 billion in 2020, an impressive 43% increase.
Thanks to this explosive trend, cap rates in the industrial sector saw some of the highest levels of compression across all property types during 2021.
However, the combination of high inflation and higher interest rates has altered the landscape.
And while the price of industrial properties isn’t expected to fall dramatically, higher cap rates mean that downward pricing adjustments and a phase of price discovery are likely on the horizon.
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