A new report from Situs RERC, a global research and advisory firm, has provided a ranking of the best markets for industrial real estate from a value vs. price perspective. The rankings are based on second quarter statistics for industrial properties in primary, secondary and tertiary markets.
Industrial real estate currently offers the greatest value compared to price of all commercial property sectors, according to Situs RERC President Ken Riggs. The firm gave the sector a rating of 5.5 on a scale of 1 to 10 in the first quarter of 2017. Industrial properties come with low risk, with little fluctuation in vacancy or return on investment (ROI), he notes. “Everyone is chasing it because rents continue going up, and there is little turnover.”
While the rankings presented in the Situs RERC Value vs. Price Index may be useful to investors, the firm’s researchers do not recommend all highly-ranked metros as great investment opportunities, and the rankings are relative, not absolute.
For example, Southern California’s Inland Empire has low vacancy, high demand and growing rents, but prices on assets have been bid up and are now so overpriced that investors buying today would achieve little to no ROI, Riggs notes.
Seattle, Dallas and Washington, D.C. respectively rank at the top of the index for primary markets. All three show positive economic fundamentals, including strong population and job growth.
A Colliers International second quarter 2017 report noted that the Seattle/Puget Sound regional vacancy rate inched up to just 3.1 percent, despite more than 2.5 million sq. ft. of new supply being delivered through the first six months of 2017.
Similarly, the Dallas-Fort Worth metro is the fastest growing major metro area in the nation, according to the U.S. Census Bureau, adding 140,000 new residents between July 2015 and July 2016. With no state income tax and relatively low cost of living, this metro area is a top go-to-city for relocating companies.
Washington’s population is also rising again. The Metropolitan Washington Council of Governments (COG) predicts that the District’s population will reach 1 million over the next 30 years.
Smaller markets
High competition and aggressive cap rates in primary markets are driving investors to secondary markets for higher yields, the Situs RERC report notes. Las Vegas, Austin, Texas and Raleigh, N.C. respectively ranked at the top for secondary markets for value relative to pricing.
While nearly 3.7 million sq. ft. of industrial speculative development is under way in Las Vegas, there is strong demand from big-box retailers and rents have continued to rise, according to a first quarter 2017 JLL report. Nearly 238,000 sq. ft. were absorbed in the first quarter.
Strong economic fundamentals have made Austin and Raleigh attractive to tech companies, which continue to fuel job creation and population growth.
Similar to secondary markets, tertiary markets offer investors a chance to diversify their portfolios and potentially get higher yields. Situs RERC researchers point out that investors may be able to achieve higher cash flows, as tertiary markets are not as saturated and provide low barriers to entry.
Tucson, Ariz., Columbus, Ohio and Richmond, Va. respectively, led the tertiary market rankings. With employers such as the University of Arizona, Raytheon and the U.S. Border Patrol, Tucson’s job and population growth should continue to grow, according to a report from real estate services firm Cushman & Wakefield.
Large employers are helping to drive job and population growth in Columbus. Additionally, the city’s location allows easy access to trade hubs, and its strong manufacturing sector will continue supporting industrial projects in the metro.
While Richmond ranked third for fairly priced assets relative to income, its growth projections are not as bright as other markets and the city might suffer from declining population, income and wage growths, Situs RERC reports.