2017 Trends in the Southeast’s Industrial Market

2017 Trends in the Southeast’s Industrial Market

The industrial sector in the Southeast continues to heat up, and like the beginning of a hot southern sun1mer, there seems to be no end in sight. Rents are up across all markets with strong deal flow and absorption in the region, all signs of positive trade winds. The Southeast claims several unique characteristics that will continue to drive industrial expansion and attract investors. Solid infrastructure, a warn1 climate and fewer regulations that allow for a business-friendly environment coupled v,ith the world’s busiest airport, two of the fastest growing ports in North America and lower labor costs make the Southeast a prime destination for job-seekers and employ­ers. As investors turn their attention to the region, we’ve observed three new trends emerging in the industrial arena: third-party logistics driving absorption, mega box development in Florida and fluctuations in rents associat­ed with cost and location.

Rapid population and economic growth in the South are transforming our cities and creating new demand for logistics centers. From Raleigh, N.C., to San Antonio, Texas, millennials are attracted to jobs in these vibrant, affordable cities, spurring major revitalization in down­town areas and increasing suburban prosperity. Together with the surge in e-commerce demand, these forces are creating new logistics pipelines. While e-commerce bulk distribution development is currently concentrat­ed in Atlanta and Dallas, the insatiable need for speed is bringing development to second tier markets like Charlotte, N.C., and Nashville, Tenn. Amazon already has a foothold in these markets with several million-sq.­ft. developments, but third-party logistic providers are driving absorption. For example, Bonded Logistics, Elite and Excel have leased over 1.1 million sq. ft. in Charlotte’s Rock Hill submarket this year.

The second emerging trend is the rise of mega boxes in Central Florida. Only two years ago, most big box distribution for Florida originated out of Atlanta, and a transaction greater than 300,000 sq. ft. was aln1ost unheard of. Now, Florida has reached a tipping point v,ith over 20 million residents, and the need to reach these customers promptly is fueling development. According to local brokers, there are as many as 10 transactions greater than 300,000 sq. ft. pending in the market. Developers are beginning to cast a wider net to areas such as Daytona, Ocala and Lakeland. Trader Joe’s landed in Daytona in 2015 with 524,000 sq. ft. and added an additional 101,000 sq. ft. the following year. Online pet supply retailer Chewy chose Ocala for its 611,676 sq. ft. distribution point, while Samsung leased 562,000 sq. ft. for its appli­ance division in Lake County.

The third developing trend is the widening rent gap between landlords competing on cost versus location. Developers are choosing scale to lov,er the cost per square foot and offer ample space for e-commerce’s growing needs. Most of these mega boxes are in the outer lin1its of urban markets, such as Henry County in Atlanta where rents have increased 8 percent since 2015. In contrast, rents in Atlanta’s airport subn1arket have increased 13 percent. In an era of cap rate compression, even a 5 percent increase in rents results in a 30-basis-point increase in return. While we’re still in the early stages, only time will tell if the gap between infill locations and fringe submarkets will continue to increase.

We don’t see any of these forces letting up as we finish 2017 and go full-speed into 2018. We believe the Southeast will continue to gain momentum as a major player on the industrial stage with second-tier markets playing a larger role, driven by the demands of the South’s growing popu­lation centers.

Gardner Lee is president of GCP. The Birmingham, Ala.-based GCP platform controls strategically located midsize bulk distribution properties in fast growing markets across the Southeast. GCP owns facilities that meet the needs of e-commerce companies operating in the global supply chain and concerned with moving goods that critical last mile.

View original article from National Real Estate Investor magazine here.