Buoyed by e-commerce, secondary industrial markets have strong future growth prospects, says CBRE

While primary industrial markets often have higher rents and lower vacancies for warehouse and distribution center space, research published today by industrial real estate firm CBRE makes the case for increasing future growth for secondary industrial markets.

In its report, entitled “Pent-up Demand: Secondary Logistics Markets Poised for Accelerated Growth,” CBRE explained that supply chain modernization has led to a warehouse development boom in primary markets that handle the majority of goods distribution, but adding that now the need for a deeper supply chain presence to cover regional locations is getting ready to accelerate secondary market growth. And while pent-up demand is intact in most markets, warehouse development response has been slow in secondary markets, leading to a growing supply/demand imbalance.

“Slower warehouse rent growth in secondary markets may have been a constraint, but now that rents have pushed past pre-recession levels, the opportunity for increased development is here,” the report noted.

Taking a look at both primary and secondary industrial markets, CBRE said that a good amount of U.S. warehouse development going back to 2011 has been in primary industrial markets like Atlanta, Chicago, and Greater Los Angeles, with the top 13 primary industrial markets seeing a 30% increase in average rental rates and a 4.9% drop in vacancy over that duration.

As for secondary industrial markets, CBRE said that these markets are now in a better position than its primary counterparts as far as growth absorption goes, with average rents in 17 U.S. secondary markets rising less than half of the rate of primary ones at 13% since 2011. And it added that developers should take solace in that the average rent in those markets is past pre-recession levels. 

In an interview, David Egan, Americas Head of Industrial & Logistics Research for CBRE, explained that the for the first half or even more of the current industrial real estate cycle going back to 2010 much of the user activity was focused on large, or Tier 1, markets, which are places where the majority of infrastructure exists, large populations are concentrated, and where much of the existing industrial stock already was. 

“Those markets really led the charge, and as a result they saw the fastest-growing rent and fastest-declining vacancy rates, which was concentrated in those markets,” he said. “The reason for that were fairly clear with much of the cycle being e-commerce driven and e-commerce is about getting access to populations of customers. We saw a tremendous amount of growth in those markets, not to suggest demand is heading down in those markets, it is not as there is still a lot of demand there.”

What is happening is that demand is getting more diversified, according to Egan. With rents rising past prerecession levels in secondary and tertiary industrial markets, he said that those markets are behaving very well but relative to the over all market are still lacking a little bit.

What’s more, CBRE maintains there is a lot of opportunity in those markets, because there is still available stock to some degree, because there are still rents under control, and e-commerce users bringing access to customers in those markets.

“If you are selling online, you are just not selling to people in Atlanta, you are selling to people all over the country,” Egan said. “You need to figure out how to get your product from wherever it is sitting to a person in New York, Atlanta, or Kansas City in the same amount of time. A warehouse in Atlanta can get an order to a customer there fast, but that same warehouse cannot service Kansas City as quickly. What we are seeing is that this level of demand is starting to filter down to these smaller markets. The populations are not as big, but they still have consumption and people buying online and meeting the same expectations of people in other parts of the country.”