While major industrial and logistics markets capture most of the headlines, industrial occupiers and investors know that dozens of secondary markets are essential to supply chains in the U.S. Of the 81 industrial markets we track, we selected five emerging industrial real estate markets outside of primary markets—these five markets to watch are based on key metrics from 2019 through 2021, including net absorption, new tenant demand, vacancy, rent growth, construction pipeline and deliveries. Additionally, we identified two honorable mentions, markets that fell short of the levels of the top five markets but have potential to shine in the future. Below we summarize why these markets stand out from the real estate perspective as well as economic indicators of success.
Five Industrial Markets to Watch –
The Unusual Suspects
Jason Price • 6/23/2022
TOP INDUSTRIAL MARKETS TO WATCH
Rankings (2019-2021): #7 Absorption / #7 Completions / #9 New Leasing / #8 Avg Construction Pipeline
Phoenix is now the fifth largest city in the nation with 1.8 million people and is growing at 1.5% annually. The Phoenix metro area boasts a population of 4.7 million and is projected to grow another 5.1% through 2026. Additionally, 2020 real gross domestic product (GDP) in the metro area amounted to $253.5 billion, up 70% from 20 years earlier when its GDP was just $149 billion. However, during that time, the national GDP surged by 117%.
Phoenix has emerged as one of the fastest growing industrial markets in the country in recent years. Demand has been vigorous with more than 57 million square feet (msf) of leasing driving 51 msf of industrial space absorbed from 2019 through 2021, placing the market among the top in the nation for both. Relative to its Q4 2018 inventory, demand over that time was 15.9%— ranking 29th nationally. To keep up with the increased demand, developers completed nearly 40 msf of new industrial product in that timeframe with another 33.0 msf in the pipeline as of Q1 2022, ranking the city as one of the largest development markets in the U.S. Its proximity to West Coast markets and ports makes Phoenix an attractive alternative for occupiers over markets like L.A. and the Inland Empire as rents are less expensive and space options are more abundant. Like the remainder of the nation, rents are on the rise, but remain significantly cheaper than in markets along the West Coast.
Rankings (2019-2021): #9 Absorption / #10 Completions / #11 New Leasing Activity
What’s propelling Columbus?
Study some of Columbus’ advantages and it becomes clear why this is an industrial market to watch. First, it’s located in a prime region in the Midwest at the intersection of I-70 and I-71, and just 70 miles from I-75. Second, in recent years, there has been a major push for industrial development near the Rickenbacker International Airport, a former air force base, now a major cargo-focused airport. Third, Columbus’ demographics have strengthened as the population has climbed by 9.3% over the last 11 years (versus 8.2% for the nation). Finally, there’s a relative affordability of doing business in Columbus, both in terms of the cost of real estate and labor. Meanwhile, Intel has plans to build two semiconductor facilities on almost 1,000 acres outside of New Albany. The sites will bring 3,000 jobs to the area and should draw interest from suppliers and partners to establish nearby facilities. Construction is anticipated to begin later this year.
From 2019 through 2021, the Columbus warehouse market added more than 26 msf of new supply, responding to industrial demand growth. The inventory now boasts 290 msf of space, making it the 16th largest industrial market in the nation, with another 14 msf of product under development. Much of the space delivered in the 2019 to 2021 timeframe was speculative. However, major occupiers were behind some notable build-to-suit projects. Demand for new, Class A warehouses has been vigorous—95% of speculative buildings completed in 2021 were pre-leased prior to completion. Over the last three years, 51 msf of new deals were signed throughout the market, primarily driven by e-commerce, consumer goods and logistics occupiers. This robust demand led to almost 29 msf of net absorption during the same period, 15.7 msf of which was recorded in 2021 alone. As a result, vacancy reached a new low of 1.7%, after declining for seven straight quarters from 5.0%. With available space tightening, landlords pushed asking rents above the $5.00 per square foot mark for the first time on record.
Rankings (2019-2021): #15 Absorption / #14 Completions / #9 Avg Vacancy Rate
What’s behind the surge in industrial?
Nashville’s central location in the Southeast U.S.—intersected by three major interstates—puts 12 million consumers within a two-and-a-half-hour drive of Music City. That geographical advantage bodes well for logistics and e-commerce users who need easy access to a large number of customers. Additionally, some major corporate announcements and relocations to Nashville, such as Alliance Bernstein, Amazon and Oracle, have had a trickle-down effect on the industrial market as more workers have migrated to the area. That’s driven more residential development, which in turn has spurred demand for construction materials and supplies, along with more consumer products. Of course, these goods flow through logistics real estate, which has helped drive demand for warehouse space to new heights.
Nashville’s industrial leasing and absorption activity has been dominated by e-commerce and third-party logistics occupiers. From 2019 to 2021, more than 19.0 msf of industrial product was absorbed, 7.0 msf of which occurred in 2021 alone. Since 2020, Amazon itself accounted for 52% of total absorption as the e-commerce giant expanded rapidly within the market. Broader tenant demand continued to yield robust totals with 9.5 msf leased in 2021, the majority of which was concentrated in Eastern and Southeastern submarkets. Significant deals leading that activity were inked by Wal-Mart, Chewy Inc., FedEx and Southerland Sleep. That elevated demand, coupled with tightening conditions, spurred developers to build almost 20 msf of new industrial product from 2019-2021, responding to the need for additional Class A warehouse space.
As of publication, Nashville has a record 14 msf of product under development, 73.6% of which should deliver by year-end 2022. Of these expected deliveries, 8.6 msf is being developed on a speculative basis. Finally, with historically tight vacancy (2.9% at Q1 2022), asking rents swelled by 28% from Q1 2021 to Q1 2022 and should trend higher as strong demand and market fundamentals persist.
Rankings (2019-2021): #12 Absorption / #11 Completions / #5 Avg. Vacancy Rate
How has surging port volumes and a healthy economy pushed industrial fundamentals higher?
Savannah’s GDP has reached almost $22 billion, up by 46% over the last 10 years (versus 19.0% for the nation). A major contributor to growth has been the Port of Savannah, which has recorded increasing trade volumes since 2017. As both the cumulative impacts of rapidly rising trade flows met limited supply, vacancy was already compressed prior to COVID-19 and the emergence of global supply chain issues. While the Georgia Port Authority has seen congestion starting to ease as the number of ships waiting to dock started to decline late last year, the market remains extremely stretched. Future expansions at the Georgia ports will help ease delays as they open in the coming years. Meanwhile, with a declining unemployment rate (which currently stands at 2.4%, well below the national rate of 3.6%) and a growing labor force, Savannah’s population has risen by 7.7% since 2016. This is compared to 3.7% for the nation and 4.9% for Georgia.
As port activity surged, the local industrial market experienced unprecedented growth. Over the last three years, Savannah absorbed more than 24 msf of product while the inventory grew by another 25 msf. Amid the robust absorption totals, Savannah’s vacancy rate has dwindled to a mere 0.5%, one of the lowest in the nation. Developers have attempted to alleviate some of the pressure brought on by expanding construction, which now stands at a healthy 23 msf. With the ongoing expansion of the Port of Savannah helping to push fundamentals, the industrial market should continue to see further growth well into the future.
SALT LAKE CITY, UT
Rankings (2019-2021): #2 Rent Growth / #10 3-year Avg. pipeline
Why Salt Lake City?
A growing population and surging economy underpin Salt Lake City’s position in our markets to watch rankings. The metro area is home to roughly 1.2 million people, and Utah’s largest city has seen an annual population growth of approximately 1.0% since 2019, outpacing the national average. On the economic front, real GDP grew around 8.5% in 2021 and is expected to increase by another 4.1% in 2022. Looking ahead, from 2023 to 2025, the economy is expected to climb at an annual rate of 2.0%, led by manufacturing and real estate. The region also offers similar locational benefits as Phoenix, given its proximity to the West Coast markets (all of which are high rent markets). Salt Lake City offers additional accessibility to the Midwest as well.
These advantages benefited the industrial real estate market. Over the past three years, Salt Lake City yielded strong rent growth with rents nearly doubling from Q4 2019 to Q4 2021, up 60% in that time. As of the first quarter of 2022, vacancy hit 1.9%, a new record low after averaging 3.6% over the past three years. Unsurprisingly, the tightness of the market has been driven by strong demand as over 28 msf of new leasing was recorded over the past three years. With deliveries totaling 15 msf for the same time, the market will need more space to help alleviate the downward pressure on vacancy. Fortunately, the pipeline is set to deliver 11 msf of new product over the next few years but Salt Lake City will likely need more as demand persists.
A smaller industrial market with just about 48 msf of industrial space, Boise has some competitive advantages, such as lower labor costs (Idaho is a “right to work” state) and land costs. Over 1.8 msf of net occupancy gains were recorded last year as third-party logistics and consumer goods tenants remained active in the market. Vacancy edged lower to a meager 1.4% as of Q1 2022, while asking rents skyrocketed by almost 30% in the past 12 months. With such tight conditions, developers are constructing 3.8 msf of new product, 2.5 msf of which is on a speculative basis.
Denver boasts a lower cost of living compared to coastal markets. Its strong demographics and growing labor force appeal to industrial occupiers. Although the market currently has 9.6 msf of speculative industrial facilities under construction, demand continues to outweigh supply, especially in the urban core. This resulted in rising land prices and rents. Last year was a record year for tenant demand, with 14.2 msf leased and a diverse tenant base fueling the total. Vacancy ticked lower for three straight quarters, ending Q1 2022 at 5.9%, while asking rents are up 14.2% year-over-year.
TOP 15 MARKETS RANKED BY INDUSTRIAL KEY PERFORMANCE INDICATORS
*Red signifies a Market to Watch