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RERC © REAL ESTATE REPORT - THE NATIONAL REAL ESTATE AUTHORITY
INDUSTRIAL
n Some of RERC’s institutional investment survey respondents
stated that the industrial sector was a good investment
opportunity during fourth quarter 2010 because of reasonable
pricing and attractive risk-adjusted returns, as job growth and
trade increased. However, respondents also noted that due
to weak leasing fundamentals and poor locations, particularly
for the industrial flex and industrial research and development
(R&D) sectors, the industrial sector overall continued to struggle,
despite continued manufacturing growth.
n RERC’s investment conditions rating for the industrial warehouse
sector increased to 6.2 on a scale of 1 to 10, with 10
being high, during fourth quarter 2010, making this the second
highest investment conditions rating among the property
types RERC analyzes. In contrast, the investment conditions
ratings for the industrial flex and R&D sectors both fell
to 4.4, indicating lower investment potential for these sectors.
n RERC’s required pre-tax yield rate for the industrial warehouse
and R&D sectors decreased to 8.7 percent and 9.2 percent,
respectively, during fourth quarter 2010. Similarly, the required
pre-tax yield rate for the industrial flex sector fell to 9.3 percent.
The required going-in and terminal capitalization rates
for the industrial warehouse and R&D sectors declined, while
the required going-in and terminal capitalization rates for the
industrial flex sector increased.
n The expected rental and expense growth for the industrial
warehouse and R&D sectors remained unchanged during
fourth quarter 2010. In comparison, the expected rental
growth for the industrial flex sector fell by 20 basis points,
while the expected expense growth increased by 20 basis
points.
n According to CBRE-EA, the national industrial availability rate
fell by 30 basis points to 14.3 percent during fourth quarter
2010. Although availability remains high, low construction
and an improving economy should further reduce availability
going forward.
20 WWW.RERC.COM
RERC Risk & Return Analysis – 4Q 2010
10-Year Average Returns 4-Quarter Rolling Returns
Warehouse R&D Warehouse R&D
NCREIF Returns 7.00% 5.26% 9.78% 11.93%
NCREIF St. Dev. 11.31% 12.47% 11.31% 12.47%
RAR* Metric 0.6 0.4 0.9 1.0
RERC Returns 9.47% 10.11% 9.10% 9.58%
NCREIF vs. RERC -2.46% -4.85% 0.68% 2.35%
*RAR = Risk-Adjusted Return.
Sources: RERC, NCREIF.
RERC Industrial Performance Cycle
Real Difference*
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
4Q 2000
4Q 2001
Market Equilibrium
All Industrial
R & D
Warehouse
4Q 2002
4Q 2003
4Q 2004
4Q 2005
4Q 2006
Sources: RERC, NCREIF, 4Q 2010.
*Difference between NCREIF realized and RERC required returns.
Warehouse Investment Criteria Trends
12%
10%
8%
6%
4Q 2000
4Q 2001
Source: RERC, 4Q 2010.
4Q 2002
4Q 2003
4Q 2004
R&D Investment Criteria Trends
12%
10%
8%
6%
4Q 2000
4Q 2001
Source: RERC, 4Q 2010.
4Q 2002
4Q 2003
4Q 2004
4Q 2005
4Q 2005
4Q 2006
4Q 2006
WINTER 2011 | VOL 39 | NO 4
4Q 2007
4Q 2007
4Q 2007
4Q 2008
4Q 2009
Terminal Cap Rate
Going-In Cap Rate
Pre-Tax Yield
4Q 2008
4Q 2009
Terminal Cap Rate
Going-In Cap Rate
Pre-Tax Yield
4Q 2008
4Q 2009
4Q 2010
4Q 2010
4Q 2010
15%
10%
-10%
-15%
-20%
-25%
-30%
-35%
© 2011 REAL ESTATE RESEARCH CORPORATION. ALL RIGHTS RESERVED.
5%
0%
-5%
12%
10%
8%
6%
12%
10%
8%
6%