Move Over Gateway Markets. Here Are The Latest Industrial Hotspots

Inland Empire, Miami, the NJ corridor and other gateway markets have traditionally been the major markets for the industrial asset class. But other secondary and tertiary markets are growing in importance and attracting new investment, as costs, capacity and production patterns drive new activity in previously lesser-loved markets.

What makes for a hot emerging market? Ranking methodologies and criteria vary, but there are a few unifying factors.

Jennifer Suhr, associate director, industrial and logistics research, for CBRE, explains what’s behind CBRE’s Top 10 Industrial Markets Q1 2023 report. “Some dynamics that make up our emerging markets (may include, but are not limited to these aspects) are those located near growing population centers, those within close proximity to ports/airports/good rail connectivity and/or elevated levels of consumers with certain radii parameters, well-connected transportation routes and markets where we’re witnessing increasing industrial occupier/investment activity,” she says.

One metric CBRE uses is a “growth rate” taking into account a market’s YTD net absorption divided by its total industrial inventory. That percentage provides insights on markets seeing industrial growth relative to the size of their own market.

CBRE’s top markets by growth rate, in descending order, are: Savannah (3.9%), Louisville (2.0%), Indianapolis (1.9%), San Antonio (1.6%), Pennsylvania’s PA I-78/81 Corridor (1.4%), Memphis (1.1%), El Paso (1.1%), Phoenix (1.1%), Reno (1.1%) and Las Vegas (1.0%).

COSTS COUNT TOO

Cost is a driver too.

Carolyn Salzer*, director and head of industrial research for the Americas at Cushman & Wakefield, points out that the attractiveness of a market is subjective to the type of occupier involved. Amazon, Walmart or Target, for example, are already located in most markets where they need to be so they are probably not moving around. But newer retailers that are working with a 3PL to start establishing their distribution network may need to move these emerging markets, especially with some of the more established or proximate markets being too expensive.

“A lot of these emerging markets are a lot more inexpensive, in terms of rents. Real estate costs in terms of the whole supply chain are still only about 7 to 10%, whereas transportation or labor are the 30 to 50%,” she says. “So being able to find a more affordable real estate option, proximate to a good labor force or being well located for transportation is definitely going to be a big factor among those emerging markets.”

A BUSINESS-FRIENDLY ENVIRONMENT

Colliers’ report “10 Emerging U.S. Industrial Markets to Watch in 2023” highlighted the merits of Austin, Charleston, Las Vegas, Memphis, Raleigh-Durham, Reno-Sparks, Richmond, Salt Lake City, Savannah and Stockton/Central Valley.

Stephanie Rodriguez, Colliers’ national director of industrial services, says there are a few prevailing themes when sizing up emerging markets. First among them is accessibility to infrastructure, whether that’s rail, a port system or highway convergence. Another is population growth.

“I would say that having a very friendly business climate has also been important to some of these markets where we hadn’t seen so much activity prior. Another would be lower costs — being a lower cost alternative to some of the tier one markets is another driving force,” she says.

WEST COAST ALTERNATIVES

Low vacancy rates, capacity constraints and labor issues at West Coast ports have occupiers and logistics providers looking for alternatives, which is opening opportunities for smaller markets to compete.

“The Inland Empire and a lot of the Southern California markets even have development moratoriums right now because of nimbyism, so that’s forcing people to look at other places like Las Vegas, the Phoenix area, and some of those other markets because there’s just no product available and there’s not that much being developed in some of them right now,” Rodriguez says.

Las Vegas has several factors that make it a resilient market for investors and occupiers, according to JLL’s Industrial Outlook report: Twenty-five percent of the U.S. population is within a two-day drive, it has competitive labor rates and real estate remains attainable. “Despite increased capital costs and elevated construction costs, Las Vegas has an extensive pipeline to meet ongoing demand,” it says.

The market is currently characterized by continued positive absorption, persistent low vacancy, significant growth in leasing activity and more new construction.

In Reno, occupancy gains reached 6.7 million square feet in 2022 and vacancy hit a record-low rate of 0.6% in the middle of last year though has since started to float back up. And in Las Vegas, industrial net absorption totaled 7.4 million square feet in 2022, down from the high-water mark of 2021 but still one of the highest net absorption figures in a decade, according to Colliers, fuelled by e-commerce-driven logistics and light manufacturing activity.

“Despite a slowdown in investment and land sales over the last six to eight months, the Las Vegas industrial market continues to thrive, with record-setting lease rates and all-time low vacancy. There is a push from companies expanding or relocating to the market, as Las Vegas has become a strategic West Coast distribution hub,” says Jerry Doty, senior vice president, Las Vegas, at Colliers.

Phoenix is also experiencing record-low vacancy rates, with a rosy outlook. “The federal government’s heavy interest in shoring up manufacturing initiatives paired with the metro’s notable presence in the aerospace and defense, EV, solar, and semiconductor sectors provide a great degree of immunity against world-wide macroeconomic instability,” says the JLL report.

ONSHORING IS ALSO A MARKET MAKER

Such markets that are seeing a lot of the onshoring activity should be the new winners in the industrial game, says Vince Tibone, managing director at Green Street. “Some of the markets that are getting some of these big facilities for electric vehicle production, solar panels, semiconductors, the markets that these major manufacturing facilities are going to are generally smaller secondary, tertiary type markets,” he says. “But when a big plant opens in these markets, there’s a big spillover effect for demand, because a lot of the suppliers of these companies will also take warehouse space in that market, so there’s an uplift in economic activity.”

With a record amount of product being delivered in 2023, it is anticipated that vacancy rates will continue to climb nationwide, however, long-term market drivers like the uptick in manufacturing sites breaking ground will help to support the industrial sector going forward, according to JLL’s report.

“The regionalization of these sites mimics the shifting population growth in the Southeast and Southwest. Additionally, this trend is bringing skilled labor candidates to these areas where millions of square feet of manufacturing space will be built,” the report reads.

Among such locations, Salzer highlights El Paso. “That’s one that we’ll be keeping an eye on, with its proximity to Mexico and all the continued conversations of nearshoring and reshoring going on in the manufacturing sector with the Chips Act, USMCA and all those factors coming into fruition,” says Salzer. “Markets like El Paso and other border towns will definitely start to see more activity due to more activity upcoming in Mexico on manufacturing.”

SAVANNAH SHINES

If there is a market that seems to tick all the boxes on the checklist, however, it’s Savannah. The booming Port of Savannah, which is outperforming the national market, is driving big demand in Savannah, which has the added appeal of being a lower cost alternative to Atlanta.

The local industrial real estate market is the top growth market in the U.S. in terms of net absorption as a percentage of total inventory (16.7%), according to Colliers. Overall net absorption reached a record 17 million square feet in 2022, more than double the previous year. Vacancy rates for warehouse space remain below 1% — the lowest in the country — due to high container volumes moving through the port. In the 2022 fiscal year, the port was ranked the third-busiest container gateway in the U.S. with 5.89 million TEUs.

Strong investment in infrastructure is supporting the growth. Terminal expansions at the port will allow it to increase annual capacity from six million to 7.5 million TEUs in 2023, and to nine million by 2025.

“Savannah has put in a ton of infrastructure to be able to keep up and their market has just exploded, they’re still growing like crazy with their proximity to Atlanta, which is one of our largest and most prominent industrial markets,” says Salzer.

Another driver of activity is coming in the form of the $5.54 billion Hyundai electric vehicle plant now under construction.

Record levels of new development delivered is also ensuring a pipeline of well-located, high-quality properties and spurring an increase in rental rates, which grew nearly 20% year-on-year. There are 33 buildings totaling more than 19 million square feet under construction. Seven are build-to-suits totaling 4.7 million square feet, and 26 are spec buildings totaling 14.4 million square feet.

Hilary Shipley, principal for Savannah at Colliers, says 2022 was a banner year for Savannah and its industrial market, citing the record absorption, construction deliveries and vacancy rate. “This year will feel different because of rising interest rates and consumer spending habits due to inflation, but the absorption rate so far in 2023 is strong, and Savannah is expected to continue to outperform other port markets,” she predicts.

*Carolyn Salzer is no longer with C&W.