Peter Muoio is the chief economist for Ten-X.

With the most active ports in the country and a huge population, it may not be surprising to hear that California is the top market for industrial investment activity. However, what is surprising is that California is home to the top five industrial buy markets in the US. According to research from Ten-X Commercial, the top five buy market for industrial investment are Los Angeles, San Francisco, Oakland, Sacramento and San Jose.

“California boasts many low vacancy markets with constraints on expansion. Trade with China and the rest of Asia is an important source of demand for industrial/warehouse space in California, so the strong growth in US-China trade has benefitted the California markets,” Peter Muoio, chief economist at Ten-X Commercial, tells GlobeSt.com. “Additionally, the state's very strong economy, including its huge tech sector, helps drive demand for industrial space, including cloud computing and R&D facilities.”

The recent legalization of recreational cannabis will only fuel more activity for industrial product, and industrial investment. “We have been highlighting the positive impact of increasing legalization of recreational marijuana use on industrial space demand for some time,” adds Muoio. “Industrial space is used for growing, warehousing, and even cash storage, as cannabis businesses cannot access the US banking system because of federal regulations against it. California's legalization will boost demand for space from this segment, but we do not think it will have quite as dramatic an impact as some other states saw, since the state already had legalized medical marijuana, and that had already driven demand for space for many of the uses that recreational legalization does.”

While capital is flooding to industrial assets, there is some concern about the new USMCA, or NAFTA 2.0, as some are calling it, might impact industrial demand; however, Muoio says that the new agreement shouldn't offset the strong investment activity. Trade wars and tariffs, on the other hand, could become a challenge, especially in California. “We do not believe the USMCA will significantly alter things for the industrial or warehouse segment from NAFTA, including in California,” he says. “The pact is not that significantly different from NAFTA in ways that would affect space demand. We are more concerned about the ongoing tit for tat tariffs being imposed by the US and China and the potential for significant decline in trade between the two countries. This would hurt the California port industrial facilities.”

Despite potential challenges, Ten-X Commercial anticipates that these five California markets will remain top buy markets through 2022. “Our buy recommendations take into consideration the outlook for markets through 2022,” says Muoio. “Our projections include the potential for cyclical downturn in 2018-20, being mindful of the length of the expansion, rising interest rates and the potential for a harmful trade war.  The good news for the industrial segment generally, and a key reason why the California markets in particular took all the spots in the top buy category, is resilience to downside cyclical pressures.”