Seaports Dominate Industrial Growth

Marcus & Millichap, Walnut Creek, Calif., said in the second half of the year, broad-based economic momentum coupled with continued consumer migration toward e-commerce should remain significant factors bolstering the industrial sector, bringing new opportunities to investors.

The company’s National Industrial Index said major seaport markets dominate at the top, led by Seattle-Tacoma with one of the nation’s lowest anticipated vacancy rates and exceptional rent growth in the sector. Orange County and Los Angeles rode to the top with two of the nation’s busiest seaports, accounting for the lowest availability in the country.

The report said markets filling out the top half of this year’s Index comprise a geographically diverse group. Miami-Dade and Fort Lauderdale are the highest-rated Florida markets, while positive supply-and-demand dynamics enabled Detroit, Portland and Cleveland to secure high rankings in the inaugural Industrial Index.

Traditional powerhouse New York City leads off the last portion, as the area has been affected by a variety of market conditions, slowing rent gains while vacancy remains tight. Other markets in the second half of the Index rose behind brighter prospects, including San Diego and Denver.

The report said proliferation of online retail is creating “structural shifts” in the industrial sector through a reconsideration of retailer space needs and supply chains. Cost savings found in storing merchandise in a warehouse and displaying products on a website are driving industrial space demand.

“Industrial demand will remain strong this year as businesses continue to expand into warehousing and distribution space, pushing net absorption past construction to compress vacancy 30 basis points,” the report said. “This year will mark the second consecutive year that supply growth surpasses 200 million square feet.”

Barring an unexpected interruption to supply chains and demand for goods manufactured in the U.S., M&M said the manufacturing sector is positioned to make positive contributions to the industrial property sector in 2017.

M&M said capital markets continued to support industrial markets, even as the performance of industrial assets continues to improve and debt providers maintain favorable attitudes toward the sector. Banks remain the dominant source of financing, offering leverage in the 65 percent range and a variety of maturities.

“Strong industrial property performance trends will sustain investor interest this year, although a modest pullback in activity reflecting economic uncertainty could continue,” the report said. “Unanticipated long-term interest rate behavior and short-term uncertainty in the Trump administration’s tax policy may cause investors to hold decisions until greater clarity emerges.”

The report noted cap rates in many of the nation’s premier metros compressed, motivating buyers to move capital into secondary and tertiary markets. “With a cap rate spread of 350 basis points between primary and tertiary markets, yield-seeking buyers may favor smaller markets,” it said. “Soaring demand for industrial properties continues this year as rising rents and robust fundamentals motivate buyers. Strong property performance, though, is leading owners to hold onto assets, likely limiting sales volume this year as investors are met with the challenge of finding suitable properties to buy.”