Commercial real estate is having a pretty good run in general these days, but in some markets the industrial sector is particularly active. After some dark days following the downturn in 2008, the industrial market is back in business in a big way.
In Q1 of this year, industrial occupancy in the U.S. hit its highest point in 30 years, and the market absorbed 57.8 million square feet of space. Vacancy rates dropped by 70 basis points over the past year, with current rates nationally at 6.1 percent.
Demand is high for industrial properties in general, but some markets are markedly more active than others. Looking at them can provide insight into what drives the resurgence of the industrial sector. NREI posted their list of 17 top industrial markets; here we’ll take a closer look at the top 5.
Top Industrial Markets
This market leads the country in rent growth and occupancy gains. San Francisco has the lowest availability rate in the nation, as of first quarter 2016, at 3.1 percent.
One factor contributing to the industrial boom here is the influence of foreign investors, who favor San Francisco as well as larger gateways like New York and Washington DC.
Foreign capital represented about 35 percent of the total industrial real estate investment in 2015, so it’s clear that it has a major impact on the industrial numbers.
Not far away, the industrial market’s story in Silicon Valley is one of short supply. The vacancy rate is at 7.5 percent and by the end of 2017, 1.5 million to 2 million sq. ft. of new industrial space will be completed there.
As you might surmise, the thriving tech sector is driving demand for industrial space in Silicon Valley. This is contributing to more construction and rent growth here and in other tech-heavy locales. Not coincidentally, two of these, Portland and Seattle, appear next on the list of top industrial markets.
Space is even tighter in this Oregon tech enclave, where availability is at 5.6 percent and 5.6 million new square feet of industrial space have been added in the past year.
The home to Microsoft and Google’s new 180,000 space in suburban Kirkland, Seattle’s industrial market demonstrates the influence of the tech sector. Low availability, particularly in downtown, has led to rapid rent growth there and a construction boom in the suburbs.
The tightest market on the list is in this mountain city, where availability of industrial properties is at 2.7 percent. A factor in this demand is the burgeoning marijuana dispensary business. Older warehouses are ideally suited as growhouses and are becoming scarce in Denver.
Driven by the increasing volume of international investment, the growing tech industry, and other new forms of commerce, demand for industrial properties in many markets is high (no pun intended). Experts predict that the resulting rent growth will continue this year, but likely level off in 2017, when inventory begins to catch up with demand.
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