Even before the pandemic struck, the US industrial real estate market was benefiting from robust e-commerce demands and third-party logistics businesses struggling to keep up with digital sales demand . Today, the industrial sector continues to outperform, setting records in leasing activity, absorption, and asking rent.
In this article, we’ll take a quick look at the industrial commercial real estate market overall, explore the top 10 cities to buy industrial real estate, and discuss the key factors that make industrial CRE a good investment in 2022.
What is Industrial Real Estate?
Industrial real estate consists of various sub-classes: fulfillment, warehouses, R&D, manufacturing, and flex facilities. All industrial properties have easy access to transportation systems in common. These include highways and interstates, intermodal freight rail, land and seaports, and air freight facilities.
Multiple structural drivers underpin industrial real estate in the US, including e-commerce, speed-to-consumer supply chain strategies, and customer adoption of high-throughput modern logistics facilities.
The rising tides of e-commerce and convenience positioned the industrial CRE market well at the start of 2021. The pandemic and subsequent recession’s compounding effects will likely accelerate the structural demand for industrial real estate in the years to come.
Year-to-date, industrial real estate has an average vacancy rate of 4.1% with positive net absorption of 365.9 62.1 million square feet. Asking rents average $7.18 per square foot for NNN leases and have increased by 8.3% year-over-year.
Demand for logistics, e-commerce centers, third-party logistic centers, food & beverage storage, and traditional retailer storage drove over 521 million square feet of new industrial construction in the US.
Top Cities for Industrial Investing in 2022
Knowing 2021’s metrics, how does this inform where best to make industrial investments in the coming year? Emerging Trends in Real Estate 2022, a report compiling a survey of over 2,000 CRE professionals published annually, breaks down the following as the top 10 industrial markets with the strongest buy recommendations.
The Cincinnati market saw 5,512,454 square feet of industrial space come to market in 2021, with an average asking rent of $4.48 per square foot and a vacancy rate of 4.8%. However, demand for industrial property in Cincinnati continues to outpace supply. Net absorption year-to-date totaled more than 5.6 million square feet, with leasing activity in Q3 alone projected to hit 4.5 million square feet.
#2 Inland Empire
The Inland Empire is home to 580,614,668 square feet of inventory, with an average asking rent of $11.26 per square foot and vacancy predicted to be just 1.0% in Q4 2021. Tenants leased over 22,400,000 square feet, with leasing activity nearly 15 million square feet in Q3 2021 alone. Since the end of last year, industrial rents in the Inland Empire have increased by over 14.4%.
#3 Dallas/Fort Worth
The Dallas/Fort Worth Metroplex is one of the largest in the US, with ample room for both existing industrial inventory and land for development. Nearly 823 million square feet of industrial facilities lie in the Dallas/Fort Worth MSA, with an average asking rent of $5.54 per square foot and 6.8% vacancy in Q3 2021. Net absorption currently stands at nearly 24 million square feet, with over 45 million square feet of industrial space under construction.
#4 Los Angeles
Supply-chain bottlenecks and surging retail sales are increasing the pressure on logistics users to meet consumer rising expectations for faster delivery options. The Los Angeles industrial market has 993,949,835 square feet of inventory with less than 5.6 million square feet under construction, as of Q3 2021. At $13.27 per square foot, asking rents in Los Angeles are among the highest in the country, with vacancy rates at 1.3%.
#5 San Diego
Population expansion away from large urban areas such as Los Angeles and San Francisco, and San Diego’s proximity to the Mexican border, is helping to drive the demand for industrial space in the marketplace. Home to 167,058,484 square feet of industrial space, the vacancy rate is 2.9% compared to 5.0% one year ago. Net absorption in San Diego is nearly 7.2 million square feet, with new leases signed for more than 1 million square feet of space in Q3 2021.
#6 Salt Lake City
Industrial inventory in Salt Lake City is 140,573,717 square feet, with more than 10.7 million square feet under construction in Q3 2021. Asking rents average $7.02 per square foot, an increase of nearly 11% compared to one year ago. In addition to being a top industrial market in 2022, Salt Lake City is also ranked in the Emerging Trends report as among the top 15 markets for overall real estate and homebuilding prospects.
Growing government regulation on the East and West Coasts is helping to drive the demand and development of industrial space in Phoenix. Inventory currently stands at 353,722,968 square feet, with new deliveries this year totaling nearly 8.3 million square feet and over 24.6 million square feet of industrial space under construction. Phoenix asking rents average $9.21 per square foot, an increase of nearly 20% over the past 12 months, with vacancy rates at 5.2%.
Medium-sized cities like Denver performed relatively well during the pandemic, and are poised for continued growth due to in-migration and new development opportunities. Denver is home to 250,551,095 square feet of industrial space with average asking rents of $9.77 per square foot. Net absorption is over 4.2 million square feet year-to-date, with nearly 3 million square feet of space leased in Q3 2021.
The economy in Seattle is large and diverse, with a significant tech presence and a large STEM (science, technology, engineering, and mathematics) employment basis. The city has 244,442,523 square feet of inventory, with only 5.6 million square feet currently under development. Asking rents in Seattle average $9.97 per square foot, and have increased by 13.4% year-over-year. Tenants signed leases for nearly 4.6 million square feet this quarter, with net absorption to date totaling more than 5.2 million square feet.
The Baltimore metropolitan area is home to 223,470,195 square feet of industrial space with another 4.2 million square feet under construction. Asking rent remains relatively affordable at $6.88 per square foot compared to nearby major metros like NYC and Boston. Baltimore boasts a vacancy rate of 4.3%, a decrease of 1.0% over the past 12 months. More than 4.4 million square feet of industrial space has been absorbed year-to-date, with more than 1.4 million square feet of space leased in the current quarter.
Factors to Consider Before Investing in Industrial CRE
It’s important to note that many markets are setting all-time performance records due to scarcity of available inventory and demand for large-box bulk distribution facilities, especially in markets near major population centers and distribution hubs in the Southwest.
While almost every major industrial market in the US is reporting positive net absorption and rent gains, not all industrial CRE markets will offer the same investment potential next year.
Here are some of the key factors to account for to make the best industrial property investments and some potential risks to consider before investing:
What makes the best industrial investment?
- Markets with high industrial demand and limited inventory see upward movements in rent
- Multi-tenant industrial property leased to users from different industry sectors can help minimize economic risk exposure
- Flexibility of space configurations appeals to a broader range of tenants and reduces the potential risk of long-term vacancies
Potential risks of industrial CRE
- Declining imports from China may reduce the demand for industrial property in gateway markets
- Enhanced focus on worker safety initiatives such as smaller shift sizes and deep cleaning of facilities are driving operational costs and the ability of tenants to absorb rent increases
- Retail mall conversions are estimated to add between 10 million and 20 million square feet of additional logistics space, which could drive net absorption rates down
Even after the pandemic runs its course and the economy begins to recover, it’s likely the focus on supply chain will continue to grow. Structural factors propelling increased demand for industrial real estate will continue to accelerate, as companies embrace a two-prong business model of just-in-time and just-in-case.
Industrial CRE markets near well-established consumer markets, access to reliable and well-developed transportation infrastructure, and an available supply of skilled labor and business-friendly governments should continue to see strong demand in 2022.