Warehouse

Investing Outside the Big Box

While multimillion-dollar projects in prime industrial markets may make headlines, 85% of industrial transactions come in under $20 million and are taking place in secondary and tertiary markets throughout the U.S. During a session at I.CON Virtual 2020, three experts discussed the investment dynamics of this vast, active and diverse sector within the industrial market. 

The industrial market benefits from the massive growth trajectory of e-commerce, as online sales growth outpace traditional retail sales. With brick-and-mortar stores closed due to the pandemic, it’s hardly surprising that this trend has accelerated – and the rate of growth is astounding.  

“It’s a trend that’s already in place but it’s a COVID-accelerated trend,” said session moderator Al Pontius, senior vice president, national director office & industrial, healthcare & special assets, Marcus & Millichap. 

The global health crisis has exposed flaws in the increasingly interlinked supply chain, Pontius said, which could lead to more U.S. onshoring of manufacturing to curtail some of these risks.  

Other potential outcomes: 

  • Industrial demand may increase as diversification in sourcing, routing and distribution becomes more important.  
  • Thorough review of “just in time” supply chain systems as businesses weigh redundancy vs. efficiency (lean).  
  • May see increased industrial and warehousing demand as companies expand inventories to accommodate greater “safety stock.”  

Industrial construction for the first quarter of 2020 remains highly concentrated in top markets like the Inland Empire, Dallas-Fort Worth, Houston, Chicago, Atlanta, Phoenix, and several other metro areas, as measured by completions, according to Marcus & Millichap Research Services and CoStar Group data.  

Meanwhile, industrial supply pressure mitigated in smaller metros like Milwaukee, Salt Lake City, Las Vegas, Detroit and Columbus, Ohio.  

“It is interesting how Detroit, over the last 10 years, really snuck up on the marketplace,” Pontius said. “A lot of people had written off Detroit.” The city had 3.8% industrial vacancy in Q1 2020 with 0.8% completions as a percentage of inventory.  

“Columbus, Charleston, Salt Lake City…I’m seeing these as hot spots,” said Curtis Spencer, president, IMS Worldwide. Spencer noted that cities like Columbus have done well throughout the COVID-19 crisis thanks to excellent logistics locations and infrastructure. He called Charleston, South Carolina, which is a base for Volvo and Mercedes, “a real sleeper” and said the city has several new deliveries being made for build-to-suit opportunities. 

Pontius noted that U.S. industrial development remains primarily in the big box space; 50% of construction in the first quarter was in the 500,000-square-foot format. In select markets (such as Charleston, Denver and Detroit), it’s even more pronounced – up to 54%. “A lot of the new supply is concentrated in the larger format,” said Pontius. 

“We have to distinguish between the pre- and post-COVID economy,” said Michael Brennan, chairman and managing principal, Brennan Investment Group, as the U.S. economy struggles to regain its footing following the initial devastation caused by the pandemic. “These smaller markets have a user demand that’s on par with the rest of the nation; we think, that shouldn’t be!” The driving force behind it, he said: e-commerce. 

“E-commerce demand is broad-based so you’re seeing absorption numbers in smaller markets that are sort of identical to the larger market overall,” Brennan said. “Some of these markets that most people had written off are coming back and in a significant way – you wouldn’t have seen that 10 or 15 years ago. This is a different pattern of absorption than the nation has seen before.” 

“Even though these markets have a lot of similarities in terms of the product size, you are also seeing the rent rates are nearly the same,” said Spencer. “The similarities between the primary and secondary or tertiary markets blew my mind.” 

“We’ve seen increasing capital moving beyond the core markets,” Pontius said. “When you break it down by primary versus non-primary market, you’ve actually seen some decline in the primary market and comparably incredible growth in the non-primary market.” In the search for improved yield and supply, capital is being drawn to other opportunities such as those in non-primary markets.  

“As an investor, or broker or lender, this may help you expand your opportunities,” Brennan added. 


JLL logo

This post is brought to you by JLL, the Social Media and Conference Blog sponsor of NAIOP’s I.CON Virtual 2020. Learn more about JLL at www.us.jll.com or www.jll.ca.

You Might Also Like