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The Top 6 Markets for Industrial Real Estate in 2021
The industrial real estate industry is thriving, and, while some believe a market correction may occur in the next year or two, others believe the strong e-commerce industry will keep the industrial market strong for several years to come.
What are the Top 6 Markets for Industrial Real Estate in the U.S.?
Check out our 2022 ranking of industrial real estate markets.
Right now, the industrial real estate sector is thriving, and, while some believe a market correction may occur in the next year or two, others believe the e-commerce industry will keep the industrial market strong for years to come. In this article, we’ll review some of the top markets for industrial real estate development and investing in the United States, factoring in economic and employment trends, construction and development rates, and a variety of other important variables.
Southern California: Inland Empire
Southern California’s Inland Empire is one of the fastest growing industrial markets in the U.S., with strong economic growth throughout 2020. For those who are unfamiliar, the area is generally thought to consist of Riverside County and parts of San Bernardino county, the two counties directly east of Los Angeles. Over the last decade, the area has added nearly 350,000 jobs, the highest percentage increase of any area in California. In addition, area-wide shipping spiked significantly in 2020, which should lead to a sustained increase in demand for industrial properties. Unemployment in the Inland Empire fell over the first quarter of 2019, and is currently approximately 4.3%, roughly equal to the unemployment rate for the state as a whole.
Since 2014, the Inland Empire area has seen 22 million square feet of positive absorption for industrial real estate. Vacancies are ranging between 2.0% and 2.5% for the western part of the Inland Empire, while they sit at around 6.5% for the eastern part. The eastern part of the Inland Empire is especially known for its availability of wide open land, which can be utilized for a variety of industrial purposes. Perhaps due to this, the eastern Inland Empire had 1.8 million square feet of properties completed in the first quarter of 2019, while the Inland Empire as a whole had nearly 30 million square feet underway at the same time. In addition, industrial rental rates are continuing to increase, averaging $0.68 per square foot for triple net leases, more than doubling from 2010.
Atlanta
Atlanta remains one of the fastest-growing commercial real estate markets in the U.S., having gained nearly 60,000 jobs over the last 12 months, almost twice the national average. Atlanta‘s warehousing and transportation industry continue to dominate employment, with 25% job growth since 2012. The manufacturing and construction industries are also growing quickly, which should lead to a substantial increase in demand for industrial space. More than 18 million square feet of industrial construction was completed in 2018, with nearly 29 million square feet in leasing activity that year, a nearly 25% jump since 2017. Overall, 21.6 million square feet of commercial real estate was absorbed in 2018. Vacancy rates have been steady, and are currently sitting at 7.7%., while 68.2 million square feet of construction is currently in progress.
Chicago
Chicago is another one of the hottest markets for industrial real estate in 2021. Over the first quarter of 2019, unemployment dropped nearly 1%, to 4.0%, bringing it close to the national rate of 3.8%. More than 8,000 jobs were added to Chicago’s manufacturing sector from Q1 2018 to Q1 2019, which is likely one of the strongest drivers of the area’s industrial real estate market.
While less square footage was absorbed than during Q1 2018, rental rates increased to $5.48 per square foot, continuing the area’s trend of industrial rent growth. In addition, industrial vacancies dropped by 1.3%, and more than 4.8 million square feet of industrial space was added via construction completions. Nearly 16 million square feet of industrial space remains in the construction pipeline, much of which should be completed in 2019. Despite this, even more projects are expected to break ground over the next 6-12 months, which should help bring supply in line with demand.
Philadelphia
Employers in Philadelphia added nearly 35,000 jobs in Q1 2019, with unemployment dropping 0.6% over the previous 12 months. 1.3 million square feet of new industrial space was finished in Q1 2019, with more than 4 million square feet expected to be finished in the upcoming three quarters, more than half of which is speculative development. Industrial rents per square foot have increased by more than 10% over the last year, to $5.28 per square foot, while vacancy has fallen approximately 30% over the last 5 years, to 3.6%. Overall, experts expect demand to increase over the coming years, leading to additional industrial development and a promising investment market.
Dallas-Fort Worth
Much like Atlanta and the Inland Empire, the Dallas-Fort Worth area is among the fastest growing in the United States, with a population increase of over 100,000 people in the last 12 months alone. Despite this increase in population, the area added 96,000 new jobs, keeping the unemployment rate relatively unchanged, at 3.5%. More than 20,000 of these jobs are directly related to the industrial economy, with a major focus on transportation, trade, and utilities.
While industrial vacancies increased over the last 12 months, this can directly be attributed to the nearly 30 million square feet of industrial space completed during this period, 5.1 million of which was added in Q1 2019. Net absorption and leasing rates remain high, which is a positive sign for the sector. Major industrial tenants/owners include Stanley Black & Decker and Ashley Furniture, which both moved into new spaces in the area over the last few quarters.
Northern and Central New Jersey
Northern and Central Jersey has long been a strong industrial real estate market, partially due to its proximity to national and international shipping through the ports of New York and New Jersey. With import numbers remaining strong in the area, analysts believe the industrial real estate market will remain strong as well. As supply is relatively low, tenants are generally trending towards pre-leasing new developments rather than competing for existing space.
Throughout Q1 2019, industrial rents increased to $8.78 per square foot, a nearly 7% increase over the last 12 months. In fact, rent prices have increased in excess of 35% over the last two and a half years, fueled by increased demands. This demand dynamic has driven further speculative industrial developments, which itself led to a small increase in vacancy over Q1 2019, though this space will very likely be quickly absorbed.
Related Questions
What are the best markets for industrial real estate investments in 2021?
The top 6 markets for industrial real estate investments in 2021 are:
Rank Market Sales Volume (Jan-July, $B) Vacancy (Q2) 1 Inland Empire $2.9 0.40% 2 Los Angeles $3.3 0.70% 3 Savannah $0.9 2.50% 4 Dallas-Fort Worth $2.2 3.20% 5 Chicago $2.1 4.50% 6 Atlanta $1.7 5.00% This information is based on data from JLL and Yardi Matrix's national industrial report.
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What are the key factors to consider when investing in industrial real estate?
The key factors to consider when investing in industrial real estate are proximity and ease of access to major transportation corridors, access to a major seaport, intermodal terminal, or freight railroad line, and the interior features of the industrial building such as column spacing, clear heights, electrical supply, and floor thickness.
Proximity and ease of access to major transportation corridors is generally a key factor. Given the volume of trucks coming and going from most distribution hubs, properties offering relatively painless ways for semis to get from a highway to the building’s loading doors is essential. It isn’t just about highways, though. An industrial structure that’s near a major seaport, intermodal terminal, or freight railroad line will realize significant benefits, not just in terms of operations but also tenant demand.
It may seem like there are a dizzying number of industrial asset characteristics compared to most other types of commercial real estate. This is true — a structure’s column spacing, clear heights, electrical supply, or floor thickness are all important to some extent — but there are three main aspects to determining whether or not an industrial facility is a good investment.
What are the benefits of investing in industrial real estate?
Investing in industrial real estate can provide a number of benefits, including potential tax advantages, increased cash flow, and potential appreciation. Industrial real estate can provide investors with depreciation deductions, which can reduce their taxable income. Additionally, industrial real estate can provide investors with a steady stream of rental income, which can be used to pay down debt or reinvest in other properties. Finally, industrial real estate can appreciate in value over time, providing investors with a potential return on their investment.
What are the risks associated with investing in industrial real estate?
Investing in industrial real estate carries the same risks as investing in any other type of commercial real estate. These risks include tenant default, longer lease terms, and slower leasing velocity. Additionally, industrial real estate investments may require significant value-add opportunities to earn a strong return on investment. This could include repositioning a dated industrial facility or bringing it up to speed with modern amenities.
What are the most important trends in industrial real estate for 2021?
The industrial real estate sector is expected to remain strong in 2021, driven by the continued growth of e-commerce and the increasing role of logistics providers in our lives. According to a second-quarter report from JLL, leasing activity in logistics, distribution, and third-party logistics continues to be strong, and manufacturing is also seeing a resurgence due to the increase in demand for electric vehicles.
In addition, the industrial real estate sector is expected to benefit from the increased demand for warehouse and distribution space due to the growth of e-commerce. According to a report from Yardi Matrix, the industrial sector is expected to remain strong in 2021, with a continued focus on the development of modern industrial space.
Finally, the industrial real estate sector is expected to benefit from the increased demand for data centers, as businesses continue to invest in cloud computing and other digital technologies. According to a report from CBRE, the demand for data centers is expected to remain strong in 2021, with a focus on the development of modern, efficient data centers.