The Future Looks Bright for Industrial Markets
by Jim Dieter

The industrial real estate landscape shifts as quickly as global trade and the world economies that drive it, suggesting that the trends and markets may not last into next week. But whether they are fleeting or have some staying power, one certainty is that, through the cycle of global trade, those trends find their way to North America and, specifically, to the six largest industrial markets—Los Angeles, Chicago, New Jersey, Toronto, Atlanta, and Dallas.

These “big six” account for almost 6 billion square feet of an industrial base. The “big six” are just that because of their close proximity to major rail centers, seaports and inland ports, large labor pools, and population bases, to name just a few common characteristics that drive growth. They are traditional markets with large and active international airports and a large composite of the air cargo business.

National developers, REITs, institutions, and investors traditionally invest in these large markets because of the depth of their respective markets, the long and proven track records of successful development and leasing, and the appeal to large institutional investors, both North American and international. Many times, institutions enter into joint ventures with developers to build speculative distribution buildings in the 800,000 to 1 million square-feet range. The average vacancy rate nationally is around 9 percent, which suggests that there is a relatively balanced supply of space versus demand.

The U.S. economic expansion is showing signs of maturity—the housing sector has cooled and gas prices have risen, but consumer confidence is still positive. The industrial market continues to expand, driven by an increase in global trade. Import growth continues at about 13.3 percent annually in real terms
while export growth is up 14.5 percent. Import growth is primarily fueled by the more cost-effective production of consumer goods offshore, and exports have increased as a result of the weakening dollar and the strong economies of our trading partners.

While there is still a favorable long-term outlook for the economy
and the consumer, there are short-term risks, which include the likelihood of higher interest rates and the potential for a weaker housing market to damage liquidity in financial markets. There are also risks of oversupply in the large distribution markets that could stall positive rent traction, though this is minimal.

Trade growth continues to drive net absorption, particularly in the large distribution markets in both the U.S. and Canada. Southern California continues to see the greatest increases in demand as deepening trade flow invigorates both the ports of L.A. and Long Beach. The Inland Empire in particular continues to do well as supply constraints, transportation issues and land-use regulations have pushed new distribution center development from Los Angeles into Riverside.

Other distribution markets that are doing well include Chicago, Atlanta, Dallas, Houston, Los Angeles, Seattle, and Indianapolis.

Demand in Chicago, for example, continues to be fueled by import flows moving from the West Coast to the East Coast, bolstering Chicago’s role as the nation’s busiest rail center and the third largest intermodal hub in the world. Intermodal growth has increased over 5 percent from last year.

The larger markets accounted for 52 percent of net absorption in 2006; they also accounted for 63 percent of new supply. With new supply of space increasing in many of the larger markets, there is a potential for below-average rental growth in the short term.

So global trade is driving the markets and the increased trade entering North America appears to be inundating the larger markets. But this may be something of a misnomer. Believe it or not, there is life beyond the “big six.”

I like to call this the year of the tertiary markets. In the world of supply chain (global trade), one of the golden rules is, he who receives the product and delivers it to the customer the most efficiently and the fastest wins. That is not always feasible for the larger markets. Congestion, thus down time, is the single greatest enemy of the supply chain process. Inherent in the large markets are congestion, labor competition and cost, and lack of available land close to the major modes of transportation, i.e. intermodal, highway access and airports.

Therefore, I believe that this year, the not-so-large markets, in particular, those that are close to seaports, will become or have become some of the more active markets in the country.

One of these markets, for example, is Norfolk, Virginia. One of the nation’s most active East Coast seaports, it has the greatest depth of any U.S. port. This means it can accommodate the largest container ships, has great rail and trucking accessibility, and is close to all the high-density population areas along the Eastern seaboard.

Both Charleston, South Carolina, and Savannah, Georgia, also are witnessing greater interest from the development community due to the growth of those markets and their respective ports. Houston is another example of an industrial market that is drawing institutional and developer interest on a national level, as large users begin to view Houston as a port destination.

In the Northwest, port markets like Oakland and Seattle/Tacoma are growing business concerns because of their positioning along near-direct routes to the large Asian markets. The Vancouver-area seaport of Prince Rupert, as well, is poised to be a burgeoning market place because of its proximity to the Asian markets and its rail routes to the Midwest.

Population growth markets are also seeing more industrial activity. Industrial markets like Jacksonville, Florida—where growth is both seaport and population driven—Phoenix, Las Vegas, Tampa and Orlando are just a few examples of population growth driving the industrial markets.

An additional factor driving industrial market growth is the strengthening of “inland ports” like Kansas City, Columbus and Dallas. All are large rail markets
with direct intermodal access to many of the most active ports. Kansas City, for example, is a direct link to the Mexican seaports via the Kansas City Southern Railway. Columbus and Dallas have significant existing, as well as planned, intermodal infrastructures, which is one of the hallmarks of the global supply chain.

Philadelphia, Baltimore, New Jersey/Newark, Savannah, and Charleston, to name but a few, are also seaport markets where brownfield redevelopment will continue to play a major role. It is difficult for developers to acquire land within close proximity to a port and/or the rail serving the port. As these areas become increasingly important in the overall national industrial marketplace due to a brighter forecast for future growth in global trade, associated brownfields will draw particular interest from the development and user community. And the golden rule of “speed to market” in the supply chain process will serve as a driving factor.

The need for strategically located land for industrial development to leverage off the global trade dynamic will demand brownfield development in several seaport-related markets and locations within North America. As the future growth of seaport markets in the U.S. seems assured, brownfield redevelopment will play a significant role in the overall development plans of some of the most strategically-located land and markets in the U.S.
Jim Dieter is executive managing director of CB Richard Ellis in Schaumburg, Illinois.