The light industrial market may be replacing the apartment market as the institutional investors favorite acquisition target. The interest in light industrial/distribution facilities is nationwide as these products are in great demand due to their stability and relative liquidity. Overall, rents are rising and vacancy rates are declining with the newfound demand. Both build-to-suit and speculative construction are underway in several markets. However, technological advances, changes in production processes, and adjustments to trade patterns have rendered a large portion of the inventory functionally obsolete. Combined with positive market factors, a significant building boom is inevitable and will most likely focus around major import-export hubs and cities with significant employment growth and low-cost manufacturing.
The need for new, modern warehouse/distribution facilities across the country is substantiated by a recent study by Cognetics, Inc. that has forecast a need for 4.0 billion square feet of industrial space in the next ten years. Projections suggest, almost 16 million square feet of speculative industrial space was under construction as of mid-year 1995 in the major U.S. markets. It is estimated that much of the country's industrial space is several decades old, which has rendered it functionally obsolete and outside ideal traffic patterns. Ceiling heights of 32 feet and enlarged loading docks are the new construction requirements which will allow the transition from "rack and ship" to a "split and ship" operation. Movement to a distinct three-tier distribution pattern will move locational preferences further into a regional and sub-regional distribution pattern. The three-tier system should benefit smaller cities, as larger hubs will be less dominant.
The heightened interest by institutional investors has driven capitalization rates downward. Going-in capitalization rates have declined from last year's average, ranging between 10.1% to 10.5% to this year's range of 9.8% to 10.1%. Declines in vacancy rates were also reported in both the CBD and suburban markets. An 8.4% vacancy rate was reported for the CBD, down from 10.6% last year, while the suburban markets also declined significantly from 9.8% last year to 7.4% this year. Both the suburban and CBD markets are expecting value changes to exceed last year's estimates. The suburban market is anticipating significant construction starts, as over 90 million square feet are expected to be constructed from 1995-1998. This is an increase from last year by over 40 million square feet.
Top Industrial Markets
Fundamental industrial market factors which were quantitatively analyzed include: vacancy rates, forecast value changes, years to balance, manufacturing and construction employment growth by percentage and absolute change. The following cities were identified as the best markets for investor opportunities based on these factors:
CBDSuburban1. Seattle, WA1. Atlanta, GA2. Denver, CO 2. Seattle, WA3. Las Vegas, NV 3. Portland, OR4. San Antonio, TX 4. Denver, CO5. Kansas City, MO/KS 5. Minneapolis, MN6. Charlotte, NC6. St. Louis, MO7. Cincinnati, OH7. Las Vegas, NV8. Atlanta, GA8. Fort Worth, TX9. Phoenix, AZ 9. Phoenix, AZ 10. San Diego, CA10. Orange County, CA
Seattle and Denver, again, hold the top two positions for the CBD industrial markets. Seattle stands alone at the top, as it ranks in single digits in the manufacturing and construction employment annual growth rates and absolute growth figures. Seattle benefits greatly from it's location as an ocean port.
Seattle, Denver, Kansas City and Cincinnati are the only four cities which are repeats in the top ten CBD markets from last year. The replacements are generally markets which are forecast to be strong growth communities in the near future. For instance, Las Vegas, which is a new top ten city in the CBD market, ranks first and third in manufacturing and construction employment growth rates.