Are Markets Reaching Equilibrium?
How Long Can The Boom Times Last For The Industrial Sector? Are Markets Reaching Equilibrium? October, 2017 page 1
The Market Has Never Been Stronger U.S. Industrial Market
page 2
Strong Demand In A Slow Growth Environment Logistics/Light Industrial Demand Vs GDP
6%
Absorption & GDP (Y/Y)
5%
4%
3%
2%
1%
0% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Logistics
Light industrial
Sources: Moody's Analytics; CoStar Portfolio Strategy
GDP As of 17Q1
page 3
Logistics Fundamentals In Equilibrium Logistics National Index Fundamentals 250
Vacancy & Vacancy Average
Annual Change in Demand & Supply (MSF) 12.9%
200
13%
8.1%
12%
150
11%
Avg: 10.1%
100
14%
10% 9%
50
8% 0
7% 6.5%
(50) 8%
6%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Annual Rent Growth 7.1% 6.7%
5.3% 4.3%
3% (2%)
1.6%
0.9%
1.0%
2.4%
0.2%
3.1%
3.9% 2.2%
1.9%
5.8% 2.8%
2.0%
1.3%
0.8%
0.1%
0.6% 2.9% 4.7%
(7%) Source: CoStar Portfolio Strategy
As of 17Q2
page 4
24
Inland Empire Chicago Atlanta Dallas FW Memphis Houston Phoenix Columbus OH Philadelphia Saint Louis Cincinnati Nashville Kansas City Charlotte Portland OR Denver Miami New York Minneapolis East Bay Indianapolis Los Angeles Edison Seattle Baltimore Detroit Northern NJ
Logistics Supply Is Strong …
Historic Supply Vs Recent Supply Supply (MSF)
21 Supply Above Average
Average Annual 2003 - 2007
Source: CoStar Portfolio Strategy
Supply Below Average
18
15
12
9
6
3
0
16Q3 - 17Q2 As of 17Q2
page 5
24
Inland Empire Chicago Dallas FW Atlanta Houston Memphis Seattle Philadelphia Edison Phoenix Cincinnati Saint Louis Baltimore Columbus OH Portland OR Charlotte Denver Kansas City Miami East Bay Nornern NJ New York Los Angeles Indianapolis Nashville Minneapolis Detroit
… Demand Is Stronger
Historic Demand Vs Recent Demand Demand (MSF)
21
18 Demand Above Average
Average Annual 2003 - 2007
Source: CoStar Portfolio Strategy
Demand Below Average
15
12
9
6
3
0
(3)
16Q3 - 17Q2 As of 17Q2
page 6
Logistics Occupancies Strong In All Hub Sizes Total Logistics Market* 99%
Current Occupancy Current Occupancy Above Long-Term Average
Los Angeles East Bay
Long Island
97%
Orange County
Washington, DC Detroit
95%
Salt Lake City
Inland Empire Lehigh Valley Milwaukee
93%
Miami Norfolk
Columbus
Pittsburgh Atlanta
Houston Baltimore
91%
Dallas - FW
Memphis
Palm Beach
Indianapolis Kansas City
Chicago Harrisburg Saint Louis
89%
Phoenix
87% 85%
87% National
Current Occupancy Below Long-Term Average
89% 91% Historical Average Occupancy† g Regional
93%
95%
Local
Source: CoStar Portfolio Strategy *Bubble Size = Market RBA. †In Most Cases, Since 2001.
As of 17Q2
page 7
Increased Speculative Construction Logistics Under Construction RBA & Occupancy In National Index 180
Under Construction (MSF)
Occupancy (%) 93%
160
93%
140 70
120 100
84 72
44
80
55
34
44 18 19
60 26
20
10
16 66 63
57 54 51
75
78
56
91%
77
90%
61 62
39
89%
28
17 19
7
92%
74
72 65
57 67
40
94%
10 60 62 52 54 51 9 3 2 2 2 1 1 1 1 2 38 32 35 36 33 29 24 27 23 23 23 22 22 22 21 21 19
73 78
71
60 60 60
73 77
87 81 92 82
88% 87% 86%
07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1
0
Committed
Available
Source: CoStar Portfolio Strategy
Occupancy As of 17Q1
page 8
$12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 East Bay Los Angeles Inland Empire Miami Orange County Seattle Northern New Jersey Reno Houston Edison Norfolk Philadelphia Nashville Phoenix Lehigh Valley Atlanta Dallas - Fort Worth Chicago Columbus OH Portland OR Detroit Memphis Indianapolis Harrisburg Saint Louis
Logistics Rents To Reach New Peaks
Logistics Rents Prerecession, Current, And Forecast Rent ($/SF)
Prerecession Max/Recession Min Range Improved Y/Y Worsened Y/Y
Source: CoStar Portfolio Strategy
21Q4 As of 17Q2
page 9
How Much Has E-Commerce Contributed ? The Good
page 10
E-Commerce Has A Long Runway Online Vs. In-Store Sales $1,100
Change (Y/Y)
Quarterly Sales Volume ($B, SA)
40% 35%
$1,000
30% $900 25% $800
20%
$700
15% 10%
$600
5% $500 0% $400
(5%)
$300
(10%) 01
02 03 04 05 06 07 E-Commerce E-Commerce Sales Growth
08
09 10 11 12 13 14 Physical Retail Sales Physical Retail Sales Growth
Sources: U.S. Department of Commerce; Moody's Analytics; CoStar Portfolio Strategy
15
16
17
As of 17Q1
page 11
Inventories Confirm Supply Chain Expansions Retail Inventories, Sales, & Their Ratio 1.80
I/S Ratio
Retail Inventories, Sales ($ Billions, Monthly, SA)
1.75
$700 $600
1.70 $500
1.65 1.60
$400
1.55 $300
1.50 1.45
$200
1.40 $100
1.35 1.30
$0 92
94
96
Inventories
98
00
Sales
02
04
I/S Ratio
Sources: Moody's Analytics; CoStar Portfolio Strategy
06
08
10
2000-11 Trend
12
14
16
2012-Present Trend As of June '17
page 12
U.S. Industrial Is 22 BSF; E-Commerce is 0.6 BSF Breakdown Of The U.S. Industrial Market By Type (Billions SF)
Total U.S. Industrial Market
U.S. Distribution / Warehouse Market
Service, 0.4 Food Processing, 0.3
E-Commerce SF, 0.6 , 4%
Truck Terminal, 0.2 Refrigerated, 0.1 Distribution, 3.4
Showroom, 0.1
Warehouse, 11.1
Manufacturing, 6.2
Non E-Commerce SF, 13.9 , 96%
Source: CoStar Portfolio Strategy
As of 17Q3 page 13
E-Commerce Small Share Of Total, Huge Of New Amazon And Rest Of E-Commerce As Share OF Net Absorption 250
E-Commerce Demand As % Of Net Absorption
Millions SF
40% 35%
200 30% 25%
150
20% 100
15% 10%
50 5% 0
0% 2012
2013
Non-Ecommerce Source: CoStar Portfolio Strategy
2014 Rest Of E-Commerce
2015
2016
2017
Amazon As of 17Q3
page 14
How Much Has E-Commerce Contributed ? The Scary
page 15
Troubled Times Getting Worse? Public Retailers Reporting Negative FYE Same Store Sales Growth 70%
Share of Public Retailers Reporting Negative Same-Store Sales Growth (Y/Y)
60%
55.0%
Back to Recession Levels
50% 40% 30% 20% 10% 0% 06
07
08
09
Sources: SEC Filings; CoStar Portfolio Strategy
10
11
12
13
14
15
16
As of 17Q1 page 16
2017 Announced Closures Outpacing 2008 Announced Store Closures By Square Feet 100
Retail SF (Millions) Announced For Closure
90 80 70 60 50 40 30 20 10 0 2008 Q1
Q2
Q3
2016
2017
Q4
Sources: Business Insider; Clark Howard; ICSC; SEC Filings; RIS; CoStar Portfolio Strategy
As of 17Q2
page 17
Top 50 Retailers Occupy A Lot Of SF Breakdown Of The U.S. Industrial Market Occupied By Top Retailers
Grocers 57 SF 5%
E-Commerce 596 SF 50%
Source: CoStar Portfolio Strategy
Top 50 Retailers 532 SF 45%
Risk Free??? 369 SF 31% At Risk 163 SF 14%
As of 17Q3 page 18
Industrial Is Popular – Deals Are Hard To Find Investment Volume
page 19
Without Industrial Would Underperform The Benchmark NCREIF Returns Vs. Without Industrial % Returns 14%
12%
10%
8%
6% 14
15 Returns With Industrial
Sources: NCREIF; CoStar Portfolio Strategy
16
17
Returns W/O Industrial As of 17Q2
page 20
New Industrial Investors Want To Write Big Checks Industrial Individual Asset Vs. Portfolio Pricing* 14%
Cap Rate
12%
10%
8%
6%
4%
2% 00
01
02
03
04
Individual Assets
05
06
07
08
09
10
11
12
13
14
15
16
17
Portfolios
Source: CoStar Portfolio Strategy *Shading = Distance from trailing 90-day mean. Size = Price.
As of 17Q1
page 21
Strong Volume Driving Down Returns Annual Sales Volume And Quarterly 90th Percentile Cap Rates 100
Annual Sales Volume (Billion $)
90 80 70 60 50 40 30 20 10 0 8%
99 00 01 Core Cap Rates
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
7% 6% 5% 4% Source: CoStar Portfolio Strategy
As of 17Q3
* 2017 Is Annualized Based On First Three Quarters
page 22
Rene Circ, Director [email protected] Involved in more than $15 billion of transactions Led the international expansion initiative at a public REIT, including Asia, Europe, and North & Central America Sought-after authority on investing in the U.S. industrial market Specialties: Industrial, Market Selection, Investment Structuring
page 23
The Market Has Never Been Stronger U.S. Industrial Market
page 2
Strong Demand In A Slow Growth Environment Logistics/Light Industrial Demand Vs GDP
6%
Absorption & GDP (Y/Y)
5%
4%
3%
2%
1%
0% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Logistics
Light industrial
Sources: Moody's Analytics; CoStar Portfolio Strategy
GDP As of 17Q1
page 3
Logistics Fundamentals In Equilibrium Logistics National Index Fundamentals 250
Vacancy & Vacancy Average
Annual Change in Demand & Supply (MSF) 12.9%
200
13%
8.1%
12%
150
11%
Avg: 10.1%
100
14%
10% 9%
50
8% 0
7% 6.5%
(50) 8%
6%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Annual Rent Growth 7.1% 6.7%
5.3% 4.3%
3% (2%)
1.6%
0.9%
1.0%
2.4%
0.2%
3.1%
3.9% 2.2%
1.9%
5.8% 2.8%
2.0%
1.3%
0.8%
0.1%
0.6% 2.9% 4.7%
(7%) Source: CoStar Portfolio Strategy
As of 17Q2
page 4
24
Inland Empire Chicago Atlanta Dallas FW Memphis Houston Phoenix Columbus OH Philadelphia Saint Louis Cincinnati Nashville Kansas City Charlotte Portland OR Denver Miami New York Minneapolis East Bay Indianapolis Los Angeles Edison Seattle Baltimore Detroit Northern NJ
Logistics Supply Is Strong …
Historic Supply Vs Recent Supply Supply (MSF)
21 Supply Above Average
Average Annual 2003 - 2007
Source: CoStar Portfolio Strategy
Supply Below Average
18
15
12
9
6
3
0
16Q3 - 17Q2 As of 17Q2
page 5
24
Inland Empire Chicago Dallas FW Atlanta Houston Memphis Seattle Philadelphia Edison Phoenix Cincinnati Saint Louis Baltimore Columbus OH Portland OR Charlotte Denver Kansas City Miami East Bay Nornern NJ New York Los Angeles Indianapolis Nashville Minneapolis Detroit
… Demand Is Stronger
Historic Demand Vs Recent Demand Demand (MSF)
21
18 Demand Above Average
Average Annual 2003 - 2007
Source: CoStar Portfolio Strategy
Demand Below Average
15
12
9
6
3
0
(3)
16Q3 - 17Q2 As of 17Q2
page 6
Logistics Occupancies Strong In All Hub Sizes Total Logistics Market* 99%
Current Occupancy Current Occupancy Above Long-Term Average
Los Angeles East Bay
Long Island
97%
Orange County
Washington, DC Detroit
95%
Salt Lake City
Inland Empire Lehigh Valley Milwaukee
93%
Miami Norfolk
Columbus
Pittsburgh Atlanta
Houston Baltimore
91%
Dallas - FW
Memphis
Palm Beach
Indianapolis Kansas City
Chicago Harrisburg Saint Louis
89%
Phoenix
87% 85%
87% National
Current Occupancy Below Long-Term Average
89% 91% Historical Average Occupancy† g Regional
93%
95%
Local
Source: CoStar Portfolio Strategy *Bubble Size = Market RBA. †In Most Cases, Since 2001.
As of 17Q2
page 7
Increased Speculative Construction Logistics Under Construction RBA & Occupancy In National Index 180
Under Construction (MSF)
Occupancy (%) 93%
160
93%
140 70
120 100
84 72
44
80
55
34
44 18 19
60 26
20
10
16 66 63
57 54 51
75
78
56
91%
77
90%
61 62
39
89%
28
17 19
7
92%
74
72 65
57 67
40
94%
10 60 62 52 54 51 9 3 2 2 2 1 1 1 1 2 38 32 35 36 33 29 24 27 23 23 23 22 22 22 21 21 19
73 78
71
60 60 60
73 77
87 81 92 82
88% 87% 86%
07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1
0
Committed
Available
Source: CoStar Portfolio Strategy
Occupancy As of 17Q1
page 8
$12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 East Bay Los Angeles Inland Empire Miami Orange County Seattle Northern New Jersey Reno Houston Edison Norfolk Philadelphia Nashville Phoenix Lehigh Valley Atlanta Dallas - Fort Worth Chicago Columbus OH Portland OR Detroit Memphis Indianapolis Harrisburg Saint Louis
Logistics Rents To Reach New Peaks
Logistics Rents Prerecession, Current, And Forecast Rent ($/SF)
Prerecession Max/Recession Min Range Improved Y/Y Worsened Y/Y
Source: CoStar Portfolio Strategy
21Q4 As of 17Q2
page 9
How Much Has E-Commerce Contributed ? The Good
page 10
E-Commerce Has A Long Runway Online Vs. In-Store Sales $1,100
Change (Y/Y)
Quarterly Sales Volume ($B, SA)
40% 35%
$1,000
30% $900 25% $800
20%
$700
15% 10%
$600
5% $500 0% $400
(5%)
$300
(10%) 01
02 03 04 05 06 07 E-Commerce E-Commerce Sales Growth
08
09 10 11 12 13 14 Physical Retail Sales Physical Retail Sales Growth
Sources: U.S. Department of Commerce; Moody's Analytics; CoStar Portfolio Strategy
15
16
17
As of 17Q1
page 11
Inventories Confirm Supply Chain Expansions Retail Inventories, Sales, & Their Ratio 1.80
I/S Ratio
Retail Inventories, Sales ($ Billions, Monthly, SA)
1.75
$700 $600
1.70 $500
1.65 1.60
$400
1.55 $300
1.50 1.45
$200
1.40 $100
1.35 1.30
$0 92
94
96
Inventories
98
00
Sales
02
04
I/S Ratio
Sources: Moody's Analytics; CoStar Portfolio Strategy
06
08
10
2000-11 Trend
12
14
16
2012-Present Trend As of June '17
page 12
U.S. Industrial Is 22 BSF; E-Commerce is 0.6 BSF Breakdown Of The U.S. Industrial Market By Type (Billions SF)
Total U.S. Industrial Market
U.S. Distribution / Warehouse Market
Service, 0.4 Food Processing, 0.3
E-Commerce SF, 0.6 , 4%
Truck Terminal, 0.2 Refrigerated, 0.1 Distribution, 3.4
Showroom, 0.1
Warehouse, 11.1
Manufacturing, 6.2
Non E-Commerce SF, 13.9 , 96%
Source: CoStar Portfolio Strategy
As of 17Q3 page 13
E-Commerce Small Share Of Total, Huge Of New Amazon And Rest Of E-Commerce As Share OF Net Absorption 250
E-Commerce Demand As % Of Net Absorption
Millions SF
40% 35%
200 30% 25%
150
20% 100
15% 10%
50 5% 0
0% 2012
2013
Non-Ecommerce Source: CoStar Portfolio Strategy
2014 Rest Of E-Commerce
2015
2016
2017
Amazon As of 17Q3
page 14
How Much Has E-Commerce Contributed ? The Scary
page 15
Troubled Times Getting Worse? Public Retailers Reporting Negative FYE Same Store Sales Growth 70%
Share of Public Retailers Reporting Negative Same-Store Sales Growth (Y/Y)
60%
55.0%
Back to Recession Levels
50% 40% 30% 20% 10% 0% 06
07
08
09
Sources: SEC Filings; CoStar Portfolio Strategy
10
11
12
13
14
15
16
As of 17Q1 page 16
2017 Announced Closures Outpacing 2008 Announced Store Closures By Square Feet 100
Retail SF (Millions) Announced For Closure
90 80 70 60 50 40 30 20 10 0 2008 Q1
Q2
Q3
2016
2017
Q4
Sources: Business Insider; Clark Howard; ICSC; SEC Filings; RIS; CoStar Portfolio Strategy
As of 17Q2
page 17
Top 50 Retailers Occupy A Lot Of SF Breakdown Of The U.S. Industrial Market Occupied By Top Retailers
Grocers 57 SF 5%
E-Commerce 596 SF 50%
Source: CoStar Portfolio Strategy
Top 50 Retailers 532 SF 45%
Risk Free??? 369 SF 31% At Risk 163 SF 14%
As of 17Q3 page 18
Industrial Is Popular – Deals Are Hard To Find Investment Volume
page 19
Without Industrial Would Underperform The Benchmark NCREIF Returns Vs. Without Industrial % Returns 14%
12%
10%
8%
6% 14
15 Returns With Industrial
Sources: NCREIF; CoStar Portfolio Strategy
16
17
Returns W/O Industrial As of 17Q2
page 20
New Industrial Investors Want To Write Big Checks Industrial Individual Asset Vs. Portfolio Pricing* 14%
Cap Rate
12%
10%
8%
6%
4%
2% 00
01
02
03
04
Individual Assets
05
06
07
08
09
10
11
12
13
14
15
16
17
Portfolios
Source: CoStar Portfolio Strategy *Shading = Distance from trailing 90-day mean. Size = Price.
As of 17Q1
page 21
Strong Volume Driving Down Returns Annual Sales Volume And Quarterly 90th Percentile Cap Rates 100
Annual Sales Volume (Billion $)
90 80 70 60 50 40 30 20 10 0 8%
99 00 01 Core Cap Rates
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
7% 6% 5% 4% Source: CoStar Portfolio Strategy
As of 17Q3
* 2017 Is Annualized Based On First Three Quarters
page 22
Rene Circ, Director [email protected] Involved in more than $15 billion of transactions Led the international expansion initiative at a public REIT, including Asia, Europe, and North & Central America Sought-after authority on investing in the U.S. industrial market Specialties: Industrial, Market Selection, Investment Structuring
page 23
