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Demand Drivers Make Industrial “Cream of the Commercial Real Estate Crop”

Industrial vacancies at year-end 2017 reached their lowest levels nationally since Ten-X Commercial began tracking the sector in 1999. By Dec. 31, 2018, they’re projected to fall an additional 30 basis points to 7%, Ten-X Commercial reported.

“Right now, industrial is the cream of the commercial real estate crop, and the trends that are driving the sector—including e-retail, cloud computing and legalized cannabis—show no signs of abating,” said Ten-X chief economist Peter Muoio.

That being said, some industrial hubs inevitably are stronger than others, and Ten-X found that the top five investment markets for this sector are all in California. Conversely, three of the top five “sell” markets are in Texas.

Leading the pack for industrial “buy” markets is the Los Angeles metro area, followed by San Jose, Oakland, San Francisco and San Diego. The L.A. region’s vacancies are perennially tight, and are expected to tighten further to a cyclical low of 2.3% as 2018 ends. Rent growth is expected to continue in the 6% range this year.

Outside L.A., the West is more broadly at the epicenter of other demand drivers, including cloud computing and legalized cannabis, Ten-X said.

On the “sell” side, Ten-X Commercial lists Dallas, San Antonio, Houston, Cleveland and Baltimore as the leading industrial markets in which investors should consider reducing or offloading their positions.

These metro areas have contended with either a heavy supply pipeline, flagging demand or a lack of fundamental growth drivers. As a result, they may face significant challenges in a projected cyclical downturn.

Ten-X Commercial creates a recessionary model to forecast the potential effects of a general, cyclical downturn, and analyzes how each sector would respond. For industrial, a modeled recession in 2019 and 2020 would have a negative impact on absorption, though the decrease in demand is unlikely to be as severe as in the previous downturn, and the recovery is expected to happen quickly.

Near term, the metrics for industrial have gone from strength to strength. Ten-X research shows that 2017 was the sixth consecutive year of accelerating rent growth, and the first year on record in which the industrial sector’s rent growth outpaced that of the other three major commercial real estate sectors.

Industrial demand is expected to remain healthy over the course of this year, with more than 10 million square feet of projected net absorption, even with a growing supply pipeline. That tally would bring 2018 absorption slightly below the levels of the past three years.


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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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