US: High debt costs suggest an industrial correction

The US five-year swap rate is currently 3.1%, some 210 basis points higher than a year ago, with commercial real estate loan margins also up 10bps-15bps by our estimates. This has pushed up the all-in interest rate by 225 basis points in the US. With the cost of debt rising, we ask ourselves what this means for cap rates? Our analysis of global gateway industrial and office markets suggests that a correction is mostly needed for US industrial and European office markets.

What you will learn:

• Our analysis suggests a 25% correction is needed on average for the gateway industrial markets in the US to compensate for the higher cost of debt.
• With cap rates currently around 2.5%, markets within the Greater Los Angeles conurbation require the largest adjustment, with both Inland Empire and Los Angeles proper requiring rises of more than 140 basis points according to our analysis.
• We remain cautiously optimistic about the outlook for the industrial sector. While US industrial total returns are expected to average 8.4% per annum over the 2022-2026 period, that is well below returns seen in the five years prior to the pandemic – when returns averaged 12.8% per annum.