Fueled by Technology Growth & Cannabis Legalization, Los Angeles, Sacramento, San Francisco, Oakland and San Jose Named as Top Five Investment Markets for Industrial Commercial Real Estate
IRVINE, Calif. and SILICON VALLEY, Calif., Oct. 25, 2018 /PRNewswire/ -- Ten-X Commercial, the nation's leading online and only end-to-end transaction platform for commercial real estate, today released its latest U.S. Industrial Market Outlook, including the top five 'Buy' and 'Sell' markets for industrial commercial real estate assets. The report, which contains data and analytics from Ten-X Research forecasts, Real Capital Analytics, Reis, RERC, U.S. Census Bureau and U.S. Bureau of Labor Statistics, indicates that the industrial sector is in high demand across the country. California, home to the top five 'buy' markets nationwide, leads the way.
The industrial commercial real estate market continues to be one of the strongest sectors in the industry with pricing averaging $85 per square foot in 2018, up from $80 per square foot in 2017 – an impressive 6.25 percent increase. Additionally, deal volume rose 21.5 percent year-over-year to $18.9 billion in the second quarter of 2018, while market vacancies decreased slightly from 2017. Amid a solid backdrop for industrial demand, healthy net absorption is projected to top 10 million square feet for 2018 – the fifth straight year of increase. Ten-X's findings indicate that California is dominating the nation's industrial sector, solidifying its place as the top state for investors to purchase industrial assets.
Today's flourishing industrial market benefits from a number of secular shifts that have led to an increase in demand for warehouse space including the rise of e-commerce, cloud computing and the legalization of marijuana in some states. While U.S. trade policy with China has recently generated uncertainty within the sector, the United States-Mexico-Canada Agreement (USMCA) is on the horizon pending approval, alleviating some uncertainty among investors.
"While the industrial market is on the rise nationwide, the sector is particularly strong in California, which makes sense when considering demand drivers for warehouse space – most notably, the increase in tech developments such as cloud computing and the legalization of marijuana in certain states," said Ten-X Chief Economist Peter Muoio. "California is home to a booming tech industry and one of the nation's most prosperous legal marijuana markets, creating a consistent need for industrial real estate assets. While the state is susceptible to the effects of trade policy because of its trading ports, investor confidence is likely to continue to improve based on developments around USMCA."
However, not all of California's industrial commercial real estate market is thriving. Southern California's Inland Empire is currently stagnant and the area is plagued by a massive supply pipeline that is expected to increase vacancies and stifle local rent growth.
"While many areas of California are experiencing massive success, others are going through a downturn," Muoio continued. "For instance, our research shows that California's Inland Empire is a top 'sell market' due to a substantial supply pipeline that will likely increase vacancies and suppress rent growth."
The Industrial Sector's Top Five 'Buy' Markets:
Los Angeles, CA Los Angeles' economy is growing steadily and employment is up 1.1 percent from last year. Insatiable industrial demand is keeping vacancy low and rents high, with vacancies measuring 2.4 percent in 2018 and effective rents at $6.94 per square foot – a 6.8 percent increase from last year and a peak growth rate for the cycle. Overall, Los Angeles is a safe bet for industrial investors as, even in a modeled downturn in 2019-20, the city would emerge with rent pricing ending up 16.7 percent higher than its current mark and vacancies up 40 bps.
Sacramento, CA Sacramento is benefiting from its thriving industrial job sectors, with employment up 1.5 percent from 2017. Salaries have also increased, particularly in the government and transportation/utilities sectors. Additionally, the population grew by 1.3 percent in 2017, nearly doubling the national rate. With vacancies at an all-time low, rents have been driven to $3.69 per square foot. In the event of a downturn in 2019-20, Sacramento would prove more resilient than average, with rents ending 12.7 percent higher than their current mark and vacancies finishing at 6.4 percent by 2022. Additionally, NOI will see an average 2.8 percent per year gain through 2022.
San Francisco, CA San Francisco's booming tech sector continues to push its economy forward. Unemployment is well below the national average at 2.2 percent and the city's industrial sector continues to excel. Vacancies measure 9 percent so far in 2018 and effective rents are at $7.50 per square foot – up 5.5 percent year-over-year, a peak growth rate for the cycle. Ten-X predicts that if an economic decline were to occur in 2019-20, rents would nevertheless end 15.5 percent up from their current mark and vacancies would finish at 9.1 percent by 2022, a 10 bps increase from the current level.
Oakland, CA Home to the fifth busiest container port in the country, Oakland's economy is continuing its slow but steady expansion, with employment up 10.3 percent from its prior cycle peak. Oakland's industrial vacancies measured 6.3 percent in 2017 and rent prices grew to $6.08 per square foot, increasing 8.2 percent year-over-year. In the event of a 2019-20 economic downturn, Oakland would prove more resilient than average, with rents increasing by 15.5 percent and vacancies increasing to 7.5 percent by 2022.
San Jose, CA San Jose's industrial sector is thriving, with a rebounding manufacturing climate driving growth. San Jose employment has increased 2.8 percent year-over-year, with salaries for the manufacturing sector up 3.6 percent from last year. Industrial vacancies are at their lowest mark since 2001, measuring 13.5% in 2017. Effective rents grew to $7.73 per square foot, up 6.5 percent since 2017. In the case of a 2019-20 economic downturn, rents in San Jose would still end up 12 percent higher by 2022, while vacancies would be 30 bps their current level.
The Industrial Sector's Top Five 'Sell' Markets:
Cleveland, OH As a result of growing manufacturing and education/healthcare services sectors, Cleveland's economy is seeing a surprising boost. However, when paired with Cleveland's declining population, unemployment rates remain at 5.2 percent, well above the 3.9 percent national average. The city's industrial vacancies remained the same from 2016 to 2017. In the case of an economic slump in 2019-20, Cleveland's rents would rise just 0.4 percent from their current mark, while vacancies would increase to 9.1 percent. Additionally, NOI will see only 0.1% average annual gains through 2022.
Suburban Maryland Suburban Maryland's economy is growing, albeit slowly, with metro employment up 1.4 percent year-over-year. The area's government sector accounts for 21.3 percent of metro jobs and payrolls in that segment have increased only 0.9 percent year-over-year. Industrial demand and rent growth in Suburban Maryland are projected to continue to underwhelm, with net operating income seeing average annual gains of only 0.2 percent through 2022. In the event of a 2019-20 downturn, Suburban Maryland would prove less resilient than average.
Dallas, TX Known for its oil and gas industry, Dallas is experiencing strong economic growth with increasing employment and population rates. However, Dallas faces a heavy supply pipeline, causing industrial vacancies to measure 9.5 percent last year in 2017 and effective rents to grow to $4.06 per square feet. Despite the strong oil and gas industry, NOI will see 0.9 percent annual losses through 2022 as the market digests the heavy supply.
San Antonio, TX San Antonio's population growth is helping fuel its expansion; the city's industrial vacancies measured 8.3 percent in 2017, down 290 bps from cycle peak. However, in the event of a downturn in 2019-20, San Antonio's industrial segment would struggle. Rents would increase 1.1 percent from their current mark while vacancies would finish up 130 bps from the current level, at 9.6 percent by 2022. Even with impressive population growth, NOI will see 0.3 percent average annual losses through 2022.
Inland Empire, CA While California is the hottest market for industrial investors, there is a massive supply pipeline that is set to increase vacancies and stifle rent growth throughout the state's Inland Empire (Riverside-San Bernardino). In the event of a downturn, rents would increase 6.5 percent from their current mark, and vacancies would rise to 9.5 percent, resulting in NOI posting and average annual decline of 0.1 percent through 2022.
Article source: https://www.prnewswire.com/news-releases/california-leads-strong-national-demand-for-industrial-commercial-real-estate-space-300737819.html
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