CBRE research points to industrial & logistics real estate potential for strategic markets

When it comes to prime industrial and logistics real estate markets, there are more options than just the ones available in high population primary markets, according to research published this week by Los Angeles-based industrial real estate firm CBRE.

In its new report, entitled “Industrial Markets Poised for Growth,” CBRE makes the case for 14 United States markets that serve as strategic options for industrial and logistics real estate investors looking for non-primary market growth opportunities.

In its research, CBRE explained that these strategic markets have registered demand for industrial and logistics real estate, which has outpaced supply cumulatively by 89 million square feet going back to 2013, with rents rising by an average of 25.2% over that same period.

And it noted that seven of the 14 strategic markets––including Detroit, Las Vegas, Salt Lake City, Milwaukee, Reno, St. Louis, and El Paso––had vacancy rates that are below or slightly above the 4.3% national average, with aggregate net asking rent growth of 6.1% annually in the second quarter of this year, which, CBRE said, makes these markets prime supply growth candidates.

The other seven markets––Greeneville-Spartanburg, Dayton, San Antonio, Savannah, Central Valley, CA, Northeastern, PA, and Phoenix, said CBRE, have more available space attributed to recent new completions, with rents, on average, up 5.6% over the last 12 months.

“The Industrial & Logistics sector continues to generate strong momentum with the growth of e-commerce and a healthy U.S. economy, but opportunities vary depending on geography, asset type and other factors,” said Jack Fraker Vice Chairman and Managing Director of CBRE Global Industrial & Logistics, in a statement. “Investors seeking higher yields can find them in several markets still hitting their stride as hubs. These markets offer the infrastructure, labor availability, connectivity to major ports, and the real estate fundamentals needed to support strong growth going forward.”

CBRE explained that various strategic markets, for industrial and logistics real estate investment, are providing investors with what it termed “compelling opportunities,” as the ten-year U.S. economic expansion has brought about lower yields and reduced available supply and land sites for new development in primary industrial hubs. And it added that things like excellent infrastructure, large millennial populations, and solid industrial fundamentals resulted in increased occupiers and investors to these strategic markets in the form of inland logistics or manufacturing hubs that include available labor supply and strong port connectivity, too.  

“Overall, these markets have large industrial labor pools at relatively low-cost,” CBRE said. “With industrial demand continuing to increase, current available space and new completions should be fully absorbed. E-commerce, third-party logistics, manufacturing and food and beverage users, which have fueled much of the demand in recent years, remain the most likely candidates to occupy new buildings.”

When asked what makes these 14 strategic markets such good options for industrial and logistics real estate investors, Matthew Walaszek, CBRE Associate Director of Industrial & Logistics Research, explained that these markets offer higher yields for investors than do many primary markets.

“Both robust demand for space and significant rent growth are driving opportunities for investors in these markets,” he said. “In Savannah, for example, developers completed construction of 4.5 million square feet in this year’s first half, 93% of which was leased prior to completion while rents rose by 14.3% year-over-year. Average class-A cap rates – a measure of a property’s value relative to its income - in Savannah are 5.75%, compared to 5.0% for all class-A stabilized properties.”

Walaszek also noted that other markets boast huge gains in absorption, which is akin to demand. Those include Phoenix, Detroit, California’s Central Valley and Las Vegas.

“Those five markets had a combined 12.0 million square feet of net absorption so far this year in comparison to 10.1 million square feet of completed construction in the same timeframe,” he said. “Other advantages for these markets include favorable demographic and local economic factors such as population growth, optimal labor dynamics and low unemployment. Greenville-Spartanburg has a projected annual population growth of 6.3% (compared to 4.2% nationally), and unemployment rate of 3.6% (national is 3.8%) with above average labor supply and lower labor cost.”

From a supply chain operations perspective, Walaszek said these markets provide some key benefits, including demographic and local economic factors, while noting that solid infrastructure may be the most critical one.

Some examples of that, he cited, include: Port of Savannah, which is one of the fastest growing seaports in the U.S., and it is going through a big expansion and Port of Stockton is the No. 1 dedicated bulk/break-bulk port in California and has grown by 126% since 2010. Proximity to large population centers also is key, he observed with Phoenix, which is already a large metro area, having one-day access to California, Nevada, Utah, Colorado and New Mexico.

Looking ahead, Walaszek said that there are other U.S. cities and regions that could be potential strategic markets in the future.

“There are Portland, Denver, and Charlotte to name a few,” he said. “They need to show fundamentals similar to the [current list of 14 strategic markets], specifically demand for space, rent growth, and competitive pricing, while also attracting investors and occupiers.”