CapRock Partners is gearing up to execute a big industrial development pipeline across the Western US and sees ample liquidity from lenders for the product type.
The activity comes as the broader commercial real estate market is seeing a shift stemming from a rising interest rate environment, which could affect pricing on new loans, founder Jon Pharris told Real Estate Capital USA.
“We’re still in the early stages of understanding how the rising interest rate environment and the changes in the 10-year Treasury over the last 90 to 120 days will ripple through the financing market,” said Pharris.
The California based lender and developer already has more than $1 billion across its two strategies: new industrial developments and value-add acquisitions.
Pharris noted the market for industrial financing is still robust. But, ripple effects from inflation and the rising interest rates employed to curb it could eventually slow originations and the market as a whole.
“Lenders are still providing financing on both existing and under construction loans and bridge loans but it’s possible that if the 10-year Treasury continues to increase that the availability of financing will decrease and/or the cost to borrow will increase, which will then have a fundamental effect on the equity returns. And that could result in prices stalling or valuations stalling,” he said.
Industrial lending a potential “sweet spot”
Industrial real estate has enough tailwinds to weather rising rate pressure better than most asset classes.
“I would say that the same two primary food groups of multifamily and industrial continue to be the sweet spot for financing, especially for construction financing. While lenders might be hesitant on other product types, they are still looking to lend, especially for top-tier developers in strong sub markets,” Pharris said.
Supply chain disruptions have made companies more eager than ever to invest in smoother logistics, and even re-shore manufacturing. And the long-term trend towards ever more extensive e-commerce operations will only increase the need for industrial real estate along critical supply routes.
“Many Fortune 1000-type companies are continuing to expand, so there is an imbalance in favor of more tenant demand than supply in all of CapRock’s markets. The fundamentals that warrant development are certainly there: we have record low vacancies in many markets nationally and robust tenant demand. But, it’s important to understand the supply pipeline in markets with lower barriers to entry,” said Pharris.
Pricing in inflation
While inflation has driven up the cost of development and value-add renovations, lenders, including caprock, have begun to smartly factor it into their originations, according to Pharris.
“Lenders are requiring cost inflation and in some cases, a higher contingency of amounts in order to make a loan. I think it’s a prudent choice,” he said. “That’s how we underwrite and view investments and our loans as well. It is good to know that lenders continue to have thoughtful and strict underwriting on their side given the changes that are happening in the economy.”