a current look at utah’s industrial dynamics and … · a current look at utah’s industrial...
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A CURRENT LOOK AT UTAH’S INDUSTRIAL DYNAMICS AND DRIVERS
All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of Newmark Knight Frank. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient’s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of Newmark Knight Frank, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains. This document is intended for informational purposes only and none of the content is intended to advise or otherwise recommend a specific strategy. It is not to be relied upon in any way to predict market movement, investment in securities, transactions, investment strategies or any other matter.
Authored by Kyle Roberts, SIOR, CCIM MAY 2020
CONTACT US FOR MORE INFORMATION AND INSIGHT INTO UTAH’S INDUSTRIAL MARKETKyle Roberts, CCIM, SIORNewmark Knight FrankExecutive Managing Director - Industrial/Capital [email protected]
Jeff Heaton, SIORNewmark Knight FrankExecutive Managing [email protected]
Lucas M. BurbankNewmark Knight FrankExecutive Managing Director [email protected]
Eli PriestNewmark Knight FrankManaging Director [email protected]
• Systemic weaknesses have been exposed throughout the supply chain. Strain on inventory management will create a change from a lean, just-in-time inventory strategy to a just-in-case inventory strategy. The just-in-case strategy will require an inventory swell as manufacturers increase quantities of carried inventory. Both Consumer Packaged Goods (CPG) manufacturers that require long lead time (LLT) items for manufacturing processes and distributors that utilize all retail channels will be impacted by the just-in-time strategy. Manufacturers, such as major automobiles and non-perishable consumer staples manufacturers, will need to respond to the increased need for carried inventory. Companies that could have a major impact on CPG inventory growth are Amazon, Target, Walmart and major grocery chains providing non-perishable consumer staples.
• Manufacturers of essentials such as Personal Protective Equipment (PPE), pharmaceuticals and medical equipment may re-shore manufacturing in response to lucrative government contracts dictating the requirement for manufacturing redundancy for future crises.
• Severe Less-than-truckload (LTL) and full-truckload (FTL) driver shortages are impacting supply chains, resulting in increased costs, inconsistent delivery schedules and less reliable forecasting for over-the-road (OTR) freight metrics.
• Third Party Logistics (3PL) companies are working with customers to meet short-term inventory builds, but there is uncertainty regarding how major corporations will approach long-term needs for inventory management, fulfillment and end user/customer deliveries.
Supply Chain Dynamics
• Warehousing demand is increasing in Utah; however, much of the need is short-term as companies analyze future occupancy requirements. Expect companies’ continued need for short-term space and–as users clarify strategy–the conversion of many needs into longer-term occupancies.
• Manufacturing activity in Utah remains robust compared to the rest of the U.S. Institutional users in the Defense, Life Sciences, Food Grade Manufacturing, Bottling and Packaging and Consumer Products sectors, as well as Utah-grown users in the Nutraceutical, Health and Beauty and Contract Manufacturing sectors are growing and seeking space to meet customer demand. There is a softening in the Carbon Fiber/Composites and Aerospace industries as demand from air carriers has decreased, excepting companies deeply engaged in Air Cargo/Freight.
• Companies reliant on providing logistical support for mass gatherings of people (sporting events, conventions and trade shows) are being negatively impacted, as social distancing and mandated state and local government stay-at-home orders have caused the cancellation of historical revenue streams for companies.
• Municipal closures have broadly affected permitting and entitlement for industrial owners and users, as lead times have increased significantly for obtaining both. Some municipalities along the Wasatch Front have been operationally proactive, while others have halted operations, disrupting typical deal flow and delivery timing.
• E-commerce has emerged as the answer to supplying consumers in a movement-limited and socially distanced environment. Prior to COVID-19, online transactions were estimated to represent between 14 and 16 percent of total retail sales worldwide, according to emarketer. As of April 2020 global ecommerce sale in the general retail sector has experienced a 209 percent growth compared to the same period last year, according to an analysis by ACI Worldwide. It is yet to be determined how many consumers who were resistant to e-commerce retail and have since adopted the method out of necessity, will convert to an online platform to purchase all, or a portion, of their future consumer staples or groceries. There will be continued, accelerated growth in the e-commerce sector.
Utah DemandDrivers
• Turmoil in the debt markets is beginning to ease; however, lending interest for new industrial projects is largely based on the degree of stabilization, low loan-to-value ratios, asset quality and capitalization/track record of the sponsors. Debt financing is being viewed with more scrutiny as lenders evaluate risk. Several Large CMBS issuances/dispositions will occur in the next quarter, which is a good metric for determining investor demand and liquidity for well-structured CMBS offerings. This is the result of investors recognizing quality, core, institutional real estate CMBS yields as an alternative to normalizing corporate bond yields, the value of which are moving back toward near pre-COVID-19 levels.
• Values and exit cap rates for quality, Class A, core, stabilized assets with long-term leases are trading at par to pre-COVID-19 levels, with forecasts that cap rates will continue to compress after mid-year as investors flock to the industrial asset class due to the lower-risk profile. Value-add industrial is in question at the moment, investors are waiting to see how lower-quality assets and assets with near-term lease expirations fare in the next six months.
Capital Markets