Posted on August 20, 2019 · Posted in Industrial / Flex, Investments, Retail

Cities like Providence, Rhode Island; Omaha, Nebraska; and Tulsa, Oklahoma are generally not part of the conversation about hot spots on America’s industrial property map.

Yet recent data from real estate development firm Cushman & Wakefield Inc. indicates that these “secondary” markets will soon be heard from, if they aren’t already.

According to Cushman‘s second-quarter industrial market analysis, Providence showed a vacancy rate of 0.1 percent. Omaha clocked in at 3.1 percent. Tulsa was reported at 3.3 percent. Gateway markets like Miami, Florida, and Seattle, Washington with greater industrial activity, reported higher vacancy rates in the quarter.

The numbers from the so-called lower-tier markets should probably be taken with a grain of salt. Industrial construction in Providence, Omaha and Tulsa remains modest, so a relatively small bump in demand could move the needle more forcefully than it would in bigger markets that have more abundant supply.

Still, the broadening of demand beyond first-tier markets like Los Angeles, New York, Atlanta and Dallas, and even second-tier markets like Minneapolis, is significant because it reinforces the staying power of the current industrial cycle, now in its eighth or ninth year depending on one’s time frame.

“The growth of the secondary tier will help sustain the overall industrial market at a healthy pace,” said Carolyn Salzer, Cushman‘s associate director of logistics & industrial markets for the Americas. “A virtuous cycle could ensue with smaller markets attracting new businesses and workers. Eventually, this could elevate them into direct competition with their primary brethren.”

In past cycles, an expanding lower-tier category would hint at a “topping out” of the market, according to Chris Zubel, who represents industrial landlords as a senior managing director in the Americas for real estate services firm CBRE Group, Inc. Not so in this extraordinary cycle, however, where demand for warehouses to fulfill e-commerce orders has turned historical patterns on its head, with supply constrained in virtually every market.

“We’ve been saying that it’s late in the cycle for the last five years, and we’ve been wrong for the last five years,” Zubel said.

E-commerce has been the rising tide lifting nearly all industrial boats, with nationwide vacancy rates hovering at historic lows of 4 to 5 percent. But it has provided a particularly bullish boost to smaller markets. Whether they are in Omaha, Orlando or Orange County, California, consumers want their online orders delivered as fast as possible. Retailers, in turn, are being pressed to forward-position their products as close as possible to their end markets. The real or perceived need to have a presence in every market will compel companies to set up shop in cities that might be considered off the beaten industrial path, yet have cheaper rents and an available pool of labor.

“The fact that there is insufficient industrial supply tightens these markets even more,” Salzer said. “Asking rents have either risen or held steady in more than 60 percent of the markets that the firm classifies as secondary.”

The smaller fry are also benefiting from the lack of capacity in first-tier markets, and the high costs of leasing any space that might be available. Square footage in the New York market, for example, can command a rate that’s five times higher than in a smaller city like Jacksonville, Florida. In many cases, there is no room at the first-tier inns no matter what anyone is willing to pay. The vacancy rate for property surrounding the Ports of Los Angeles and Long Beach, the country’s busiest seaport complex, was reported at 1.7 percent in the second quarter, according to Cushman data.

“Only companies with enormous operational scale can justify the cost of occupancy in the top markets,” said Walter Kemmsies, economist and chief strategist at real estate services firm JLL Inc. “For smaller importers that may use one distribution center to move product across the retail channel, locating in a high-cost market is often unnecessary. The firm has been talking with clients that are mulling the possibility of shifting distribution operations from first-tier markets to cheaper cities without it affecting their delivery performance.”

 

Source: Yahoo! Finance

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