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Top 10 Markets for Industrial Rent Growth

E-commerce is a Big Driver in Pushing Up Rents

Photo: Pixabay
Photo: Pixabay

The transformation of retail continues to be a boon for industrial real estate across the country.

Retailers are increasingly looking to marry the physical with online to give customers a multitude of buying options. That in turn has created a demand for locating warehouses and distribution centers closer to shoppers so goods can be delivered quickly no matter how they are ordered.

As a result, vacancy for so-called industrial real estate across the country has dropped to a near historic low. CoStar data shows vacancy at 4.97%, a touch higher than it was earlier this year but still less than half of what vacancy was a decade ago.

Developers building new warehouses and distribution centers before lining up a tenant -- so-called spec development -- now accounts for than half of the buildings slated to open in the last half of this year, according to a CoStar report. The added space should find takers but could dampen the growth in rents in the future.

Drawing from CoStar data, here are the Top 10 cities for average rent growth for industrial real estate over the past 12 months.

10. Richmond, Virginia – 6.3%

Aerial of Facebook's data center under construction in the Richmond area. Photo: CoStar Group

Virginia’s state capital may have the least amount of industrial space among the Top 10 with 128 million square feet, but demand is rising. Facebook is investing $1 billion on a second phase of a data center. Brother International announced earlier this year that it is moving its East Coast distribution to the area.

Still, rent growth is about half of what it was last year, due partially to the mix of space available.

“A lack of available high-end space may be partially to blame; very little new space is available for lease,” CoStar’s Richmond market report noted.

9. San Jose, California – 6.9%

One of three industrial buildings Google bought from Trammell Crow Co. in 2018. Photo: CoStar Group

The technology sector has been a key driver in industrial real estate in the heart of Silicon Valley. Its current pace is down from a high point in 2015 when rent growth topped 12%. As is the case with other real estate types, industrial space around San Jose commands some of the highest prices in the country. CoStar’s San Jose market report noted the data hosting operations help fuel those high rents.

8. Inland Empire, California – 7%

Amazon's new 1-million-square-foot fulfillment center in Eastvale. Photo: CoStar Group

This area has the most industrial real estate of the Top 10 at 641 million square feet. It’s been a major benefactor of the e-commerce boom, particularly with goods coming from Asia into the ports in Los Angeles and Long Beach. Target, Walmart, Amazon and General Pacific are some of the more prominent warehouse tenants active in the area over the past several years, according to CoStar’s Inland Empire market report.

7. Boston – 7.2%

F.W. Webb Company's new distribution building in Londonberry, New Hampshire. Photo: CoStar Group

E-commerce has increased the importance of Boston’s industrial space. Incomes have been rising along with a growing population in Boston. CoStar’s Boston market report noted that this has meant retailers have focused on making faster deliveries, “leading to surging levels of demand for last-mile logistics space.” There’s also strong demand for high-end manufacturing space for biotechnology companies.

CoStar’s report highlighted one rarity – a loss in inventory. Over the past decade, more than 20 million square feet of has been demolished or converted. Multi-family and office construction has pushed into former industrial areas. There’s just 965,000 square feet of industrial space under construction in Boston, which represents 0.3% of its total inventory, or the smallest in the pipeline among the Top 10.

6. Nashville – 7.5%

Rooms To Go recently leased this 900,000-square-foot distribution building in the Nashville area. Photo: CoStar Group

Music City has garnered headlines for the trophy nameplates it has landed from the likes of Amazon and asset management firm AllianceBernstein. But its industrial real estate has been just as strong.

Three major interstates – I-65, 40 and 24 – intersect in Nashville, making the city a regional distribution hub. The addition of I-840 opened more development opportunities. “Rent gains in Nashville have been exceptional throughout most of the cycle and rents have increased by nearly 70% since 2010,” according to CoStar’s Nashville market report.

5. Salt Lake City – 7.6%

A newly built 374,000-square foot warehouse near Salt Lake City's airport. Photo: CoStar Group

Utah’s capital has the lowest vacancy in the Top 10 at 4%. Rent growth began a steep climb early last year. CoStar’s market report shows that e-commerce has been a big factor. Most of the 4 million square feet under construction now is for logistics use.

(Tie) 3. Orlando – 7.8%

A new industrial building that now houses an Amazon fulfillment center. Photo: CoStar Group

As with other cities, e-commerce is spurring development to serve a growing population. Amazon recently built an 865,000-square-foot distribution center here.

Tight vacancy has allowed property owners to push rents up. “However, the market is largely absorbing new supply with little difficulty and the remaining space underway appears manageable based on recent demand,” said CoStar’s Orlando market report.

(Tie) 3. Las Vegas – 7.8%

One of the newest industrial buildings in North Las Vegas. Photo: CoStar Group

The city is, of course, known for its casino resorts. But a decade ago, local leaders initiated an effort to promote Las Vegas as a “West Coast logistics center." They made improvements to infrastructure and took advantage of existing rail lines and air freight facilities. Most of the new construction has been for distribution centers.

The city of North Las Vegas instituted quick permitting and offered financial incentives to spur development, according to CoStar’s Las Vegas market report. Even though rent growth has been strong, “rent levels still trail pre-recession highs,” the CoStar report noted.

(Tie) 1. Sacramento, California – 8.7%

A developer constructed this 387,000-square-foot building last year specifically for Atlanta-based Veritiv Express. Photo: CoStar Group

Rents are strong because there’s little under construction. California’s state capital has 865,000 square feet under construction, or 0.5% of its total inventory of industrial space. That’s the second-smallest amount only to Boston.

CoStar’s Sacramento market report noted that the area relies on local and regional tenants despite being close to major distribution hubs such as Reno, Nevada, or nearby California areas East Bay and Stockton. “A number of multinational concerns have metro footprint, but, with one notable exception, few have added space in recent years,” the CoStar’s report said.

A new catalyst may be coming. The report said demand by marijuana cultivation operations for small to mid-sized spaces has increased since pot was legalized three years ago.

(Tie) 1. Providence, Rhode Island – 8.7%

A proposed warehouse building in the Providence area. Photo: CoStar Group

Boston’s relative lack of new warehouse construction has been good for Providence. “As land has become expensive closer to the city of Boston, industrial development has pushed into the Providence market,” according to CoStar’s Providence market report.

Boston’s economy is much bigger and faster growing than its New England neighbor 40 miles to the south. This has meant Providence’s industrial real estate has become a prominent distribution hub.

“Rents in the Providence metro are expanding at record rates,” the CoStar report noted.

Like Boston, industrial real estate development in Providence has been offset some by demolition of old, obsolete buildings, or they have been converted to loft residential and offices.

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