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Ten-X Research: Tech-Driven Economy Drives U.S. Industrial Vacancy Rates To Lowest Levels In Nearly Two Decades
Latest U.S. Industrial Market Outlook Identifies Nashville, Phoenix, Oakland, San Diego and Seattle as the Top 5 Markets to Buy Industrial Properties
IRVINE, Calif. and SILICON VALLEY, Calif., April 19, 2017 /PRNewswire/ — Ten-X, the nation’s leading online real estate marketplace, today released its latest U.S. Industrial Market Outlook, including the top five “Buy” and “Sell” markets for industrial real estate assets. The Spring 2017 analysis finds that technological shifts in the overall economy have been steadily delivering benefits to the industrial sector and have helped drive vacancy rates to their lowest levels in nearly two decades.
The forecast indicates that Nashville, Phoenix, Oakland, San Diego and Seattle are the top markets in which investors should consider buying industrial assets. Notably, the western region lays claim to four out of the top five “Buy” markets, with Southern California benefiting in particular from trade flows with China, as Trans-Pacific commerce is driving absorption in the region. The report cautions, however, that the current political environment casts some uncertainty over the region’s recent trade benefits.
Ten-X also pinpointed Houston, San Antonio, Indianapolis, Dallas and Fort Worth as the five markets where conditions are most likely to motivate investors to sell industrial properties. Four of the country’s top five “Sell” markets are situated in Texas, where depressed oil prices are weighing down absorption, while a steady stream of supply additions puts upward pressure on vacancy rates.
Nationally, Ten-X Research found that robust absorption has helped drive industrial vacancies down to just above 8 percent — their lowest levels since 2000. With a narrowing supply pipeline, these vacancies appear poised to run as low as the mid-7-percent range by the end of next year, a level below their 1990’s cyclical lows. The two principal tech-propelled drivers of industrial absorption are the acceleration in e-commerce — triggering the need for more distribution and warehouse space — and the rising demand for cloud server farms.
With oil prices trending near $50 a barrel, the energy sector is no longer contributing to growth in industrial real estate as in past eras. Marching parallel to oil prices, capacity utilization has remained stalled for several months, hovering around 75 percent.
The analysis also cited stalled trade flows, owing to a global economy that appears to be “stuck in a rut.” And while Southern California reaps the benefits of trade with China, that country has also been experiencing inconsistent growth. Other impediments on the trade front are attributable to stagnation in Japan and political uncertainty in the European Union. Moreover, here in America, Ten-X Research notes that the new administration has shown hostility towards trade.
“Technology is steadily deepening its impact on the American economy, and it’s doing so in a way that benefits industrial real estate in a meaningful way,” said Ten-X Chief Economist Peter Muoio. “In fact, our forecast indicates that technology’s positive impacts on this asset class, at least for now, are proving strong enough to offset damage caused by weak oil prices and an uninspired global economy. While the industrial sector still seems to be in good health, one of the biggest question marks facing it arises from potential shifts in U.S. public policy that could one day come to suppress trade flow.”
The study anticipates that effective rent growth will average over 3 percent annually through 2018 amidst the tightening market. While industrial market vacancy is expected to tumble from 8.2 percent in 2016 to 7.5 percent in 2018, the analysis projects a 2019-2020 recessionary model that would send vacancy levels up to 9.2 percent in 2020.
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2016 – 2020 INDUSTRIAL PROJECTIONS
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Top 5 Buy Markets
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2016 Final Effective Rents (psf)
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2020 Forecast Effective Rents (psf)
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Change in Effective Rents (%)
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2016 Final Vacancies (%)
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2020 Forecast Vacancies (%)
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Change in Vacancies (bps)
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Nashville, TN
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3.55
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3.94
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11.0%
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4.5
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5.8
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130 bps
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Phoenix, AZ
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4.74
|
5.14
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8.4%
|
10.2
|
11.2
|
100 bps
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Oakland, CA
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5.24
|
5.68
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8.4%
|
7.4
|
9.0
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160 bps
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San Diego, CA
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6.64
|
7.21
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8.6%
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6.1
|
6.5
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40 bps
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Seattle, WA
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5.05
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5.46
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8.1%
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4.5
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6.6
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210 bps
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Top 5 Sell Markets
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2015 Final Effective Rents (psf)
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2020 Forecast Effective Rents (psf)
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Change in Effective Rents (%)
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2015 Final Vacancies (%)
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2020 Forecast Vacancies (%)
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Change in Vacancies (bps)
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Houston, TX
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4.20
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4.17
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-0.7%
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8.3
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10.6
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230 bps
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San Antonio, TX
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4.27
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4.40
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3.0%
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7.2
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9.5
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230 bps
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Indianapolis, IN
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3.69
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3.86
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4.6%
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9.5
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10.4
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90 bps
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Dallas, TX
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3.87
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3.93
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1.6%
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11.6
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13.6
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200 bps
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Fort Worth, TX
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3.51
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3.63
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3.4%
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10
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11.1
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110 bps
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U.S.
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4.67
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4.92
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5.4%
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8.2
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9.2
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100 bps
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The Industrial Sector’s Top Five “Buy” Markets:
Nashville
Favorable demographics help drive Nashville’s appeal as a first-class industrial market. Metropolitan area employment stands at an all-time peak at a level 21-percent higher than the prior peak, driven in part by the mining/construction sector, which witnessed a surge in job growth last year. Nashville’s population growth has been accelerating steadily for the past five years. Industrial vacancies stand well below national levels, and will fall to the mid-3-percent level by next year, as robust demand outpaces supply additions. With industrial availability tightening, effective rent growth will accelerate, averaging nearly 4.6 percent through 2018. Ten-X Research expects Nashville to enjoy America’s best net operating income (NOI) growth among all major metro areas as rents climb and vacancies decline, projecting average annual NOI growth of 3.5 percent through 2020.
Phoenix
Strong population and employment dynamics contribute to Phoenix’s favorable investment outlook. The metro area population grew by 2 percent in 2015, double the national rate — which the region has outpaced for 25 years running. Metro Phoenix employment currently stands at an all-time high, driven in part by a transportation/utilities sector that has witnessed annual growth in the 5- to 6-percent range since 2015. As the supply pipeline lightens in 2018, industrial vacancies are expected to decline to 9 percent, but the vacancy rate will tick over 11 percent by 2020. Ten-X Research anticipates an average 3.8-percent increase in effective rents through 2018, and an average NOI growth of 2.9 percent annually through 2020.
Oakland
Oakland has demonstrated consistent job expansion throughout the recovery, with jobs growing annually at a mid-2 percent to mid-3-percent rate. The area’s leisure/hospitality sector has been particularly strong, growing at a 4- to 6-percent rate since 2012, while Oakland’s population growth has outpaced that of the U.S. since 2008. The analysis anticipates strong effective rent growth that will trigger NOI gains of approximately 2.8 percent per year through 2019. Ten-X Research predicts a slight decline in industrial vacancies through 2018, while rents rise at a rate of 4.1 percent in the same period. Under the expected downturn scenario, however, the report predicts that vacancies will increase and absorption will decline in 2019-2020.
San Diego
Employment growth in San Diego has continued to measure between 2 and 3 percent, with a significant surge in the leisure/hospitality sector, which has grown by more than 25 percent through the recovery. The city’s unemployment stands slightly below national levels, and despite a slowdown in population growth in 2015, San Diego still outpaces the U.S. rate. Ten-X expects tight availability and healthy rent growth to support solid gains in NOI, which should see average annual growth of 2.7 percent through 2020. With a weak supply pipeline and strong absorption, vacancies are expected to fall to the mid-5-percent range by the end of 2018 before climbing by 100 bps through 2020.
Seattle
Seattle’s employment is at an all-time peak and still growing, with annual gains that have exceeded 3 percent since 2015. Metro unemployment is in steady decline, with construction/mining jobs standing 50 percent above their cyclical trough. Ten-X Research expects industrial demand to easily outpace new supply through next year, with vacancies falling to the mid-3-percent level. The downturn scenario, however, sees vacancies rising to about 6 percent by 2020. Robust demand and strong rent growth will push NOI growth to an average of 2.7 percent annually through 2020.
The Industrial Sector’s Top Five “Sell” Markets:
Houston
Low oil prices are taking a toll on the Houston economy. Though employment growth has been positive, it has slowed to less than 1 percent annually since the end of 2014. The construction/mining and manufacturing sectors have been damaged most by the oil fallout, with notable payroll declines over the past two years. Houston’s industrial market is grappling with heavy supply and reduced demand owing to lower oil prices, and vacancies are expected to reach the mid-10-percent range by 2020. Ten-X Research does not expect NOI gains to exceed 0.5 percent through the same period.
San Antonio
Though San Antonio’s demographics do not ring alarm bells, the city’s industrial market is far from favorable. While metro employment growth has slowed, it still posted gains in the mid-2-percent range in 2016, and unemployment is well below the national average, with the education/healthcare services sector serving as a primary driver of new jobs. But despite few expected completions ahead, Ten-X Research expects San Antonio vacancies to decline only modestly by next year. By 2020, it foresees vacancies rising to the mid-9-percent range, surpassing the national average. Effective rents will climb at a mid-2-percent rate through next year, and the area’s NOI growth will average only 1.2 percent annually through 2020.
Indianapolis
Indianapolis employment growth has been fairly solid, with annual gains in the mid-2-percent range over the past two years. Metro-area unemployment, now in the high-3-percent range, is below the national rate, and the area’s population growth has outstripped the U.S. average for more than 25 years. But the industrial market is troubled by weak demand, despite few anticipated supply additions. Under the projected downturn scenario, availability will rise to the mid-10-percent range by 2020. High availability will be a drag on NOI growth, which will average only 1.5 percent annually through 2020.
Dallas
Despite a diverse and flourishing economy, weak industrial dynamics are affecting the health of Dallas industrial real estate. Dallas has seen annual employment growth ranging between the mid-3 and high-4-percent range since 2013, and the city’s unemployment is lower than the U.S. average. Weak oil prices have boosted the wholesale trade sector, which witnessed double-digit annual growth through most of 2016. And with a drop-off in completions, vacancies will decline to the mid-10-percent range over the next two years. But Ten-X Research’s recession model predicts vacancies will climb to the mid-13-percent range by 2020. NOI growth will average nearly 4 percent through 2018, but decline sharply by 2020.
Fort Worth
While Fort Worth has been fending off damage attributable to low oil prices, its industrial market is burdened by poor fundamentals and weak rent growth. The area’s economy accelerated through 2016, and its unemployment rate – though unchanging –is lower than that of the U.S. as a whole. Population growth also exceeds the national rate. Ten-X Research projects Fort Worth’s industrial vacancy rate declining modestly through 2018, before climbing to the low-11-percent range. Rent growth will average in the high-2-percent range through 2018, but then decline by 1.1 percent annually in the Ten-X Research model’s 2019-2020 downturn scenario. NOI growth will average only 1.6 percent per year through 2020 due to weak rent increases and stalling fundamentals.
About Ten-X
Ten-X is the nation’s leading online real estate transaction marketplace and the parent to Ten-X Homes, Ten-X Commercial and Auction.com. To date, the company has sold 275,000+ residential and commercial properties totaling more than $46 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.
SOURCE Ten-X
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