Ten-X Industrial Outlook Lists Top ‘Buy’ and ‘Sell’ Markets

Ten-X’s just-released report, “U.S. Industrial Market Outlook,” forecasts healthy expansion in the long term for industrial real estate assets, thanks to the continued rise of distribution centers tied to the growth of e-commerce and the increasing use of warehouses as cloud computing facilities. Ten-X is the nation’s leading online real estate marketplace and the parent of Ten-X Homes, Ten-X Commercial and Auction.com.

Ten-X Research’s data suggests that Nashville, Tennessee; Los Angeles; Memphis, Tennessee; Atlanta, Georgia; and San Bernardino-Riverside, California, are markets in which investors should consider buying industrial assets. While overall economic conditions in these areas differ, each finds itself in a unique position to capitalize on the mounting demand in the sector, citing strong absorption rates that promise to outpace supply over the next two years.

Other markets, particularly those that rely heavily on energy industries, are struggling amid the lasting slump in oil prices, which has contributed to an economic malaise affecting nearly all real estate sectors. Four Texas cities – Houston, Dallas, Fort Worth and San Antonio – are among the metro areas where Ten-X believes industrial investors might consider selling their properties. Suburban Maryland, a region in which the economy has proven sluggish due mostly to low population growth and a floundering professional and business services industry, also made the “Sell” list.

Overall deal volume for industrial assets fell to $12.5 billion during the second quarter according to Real Capital Analytics – a 26 percent decline from the same period in 2015. But vacancies have fallen into the mid-8 percent range, and rents have seen an uptick of about 2 percent year-over-year.

“The industrial sector is benefitting from the same shifts that are afflicting its retail counterpart. As more and more people choose to stay home to do their shopping, companies need more space to house and distribute the products they sell online,” said Ten-X Chief Economist Peter Muoio. “While other economic factors are hurting energy-dependent and port-exposed markets, this change in consumer behavior appears built to last, and puts industrial owners in a favorable position for the years to come.”

A majority of indicators show the sector should continue to blossom, as Ten-X Research predicts rents should increase by approximately 3 percent over the next two years. Vacancies, meanwhile, are likely to fall as low as the mid-7 percent range in 2018, which would be their lowest since 1990.

Investors should remain cautious, however, as the sector will remain vulnerable to a cyclical downturn on the horizon. Research shows vacancies are poised to rise to around 9 percent by 2020, while rents are projected to see a decline of about 1 percent per year beginning in 2019.

Industrial Sector’s Top Five ‘Buy’ Markets

Nashville

A surging economy, fueled by strong employment levels and skyrocketing population growth, puts Nashville at the top of the list for industrial investors. Thanks to a burgeoning professional/business services sector, unemployment in Music City has fallen below 3 percent, well below the national average. Ten-X Research predicts a strong absorption rate will push industrial vacancies below 4 percent by 2018. Coupled with steady rent growth, owners can expect top line income to increase by roughly 3.5 percent annually through 2020.

Los Angeles

Boasting an industrial vacancy rate of only about 3 percent – among the lowest in the country – Los Angeles is an ideal climate for industrial growth. Despite relatively modest population increases and a jobless rate slightly above the U.S. rate, employment has reached an all-time high, propped up by the city’s education and healthcare services industries. Effective rents are expected to grow by more than 4 percent annually through 2018, though the already-low availability will keep annual NOI growth to a more tempered 2.9 percent, according to Ten-X Research.

Memphis

Despite nearly non-existent population growth and uneven employment gains, Memphis is home to one of the strongest industrial sectors in the U.S., Ten-X Research shows. Its status as a national distribution hub has driven vacancies from their peak of 17 percent to below 13 percent. Limited supply additions are expected to drag those rates down even further, to less than 10 percent by 2018. Ten-X predicts rents will continue to rise over the same period, while NOI growth is projected to measure about 2.7 percent.

San Bernardino/Riverside

This Southern California market has seen both employment and population growth slow from their recent years, but it remains an appealing venue for the industrial sector. Ten-X Research projects that employment will increase by more than 3 percent annually through 2018, while the area continues to add population at a rate faster than the national average. Robust demand for industrial space is expected to pull vacancies to below 5 percent by 2018, while rents should continue to grow by nearly 4 percent per year. However, Ten-X data indicates that souring demand and an anticipated cyclical downturn could double the vacancy rate as early as 2020.

Atlanta

Atlanta is experiencing healthy demand for industrial space, driven largely by steady population growth and job gains that have pushed overall employment to an all-time high. The market is prepared to absorb the slug of supply that is slated to hit the market in the next two years, and rents should rise by more than 3 percent annually over the same time frame, according to Ten-X Research. Though the market is likely to take a step back during the cyclical downturn, investors can still expect annual NOI growth of roughly 2.5 percent through 2020.

Industrial Sector’s Top Five ‘Sell’ Markets

Houston

A struggling market that’s grappling with abundant supply and dwindling demand puts Houston atop the report’s “Sell” list. Low oil prices continue to weigh on Houston’s economy, as the construction, mining and manufacturing sectors have been hit the hardest. Ten-X Research shows that this low demand for oil has stunted effective rent growth – which will average only 2.4 percent annually through 2018 –  and predicts Houston’s industrial market will face steep declines in 2019 and 2020.

Dallas

Although Dallas’ economic diversity sustains strong metro-area employment, measuring in the high 3 percent range, its industrial market is struggling with a heavy supply pipeline with limited prospects for absorption. Ten-X Research predicts that vacancies will remain level through 2018 in the high 11 percent range, along with a flattened effective rent growth. Additionally, the sector’s market NOI growth is expected to be constrained to 1.1 percent per year through 2020.

Fort Worth

Like its neighbor Dallas, Fort Worth is also struggling to keep up with supply additions while its economy is waning amid low oil prices. Most of the losses seem to be contained in the construction, mining and manufacturing sectors – a familiar trend in the region. But while vacancies have dropped to the mid 9 percent range, Ten-X Research predicts NOI growth will be stunted by the lack of absorption and mediocre rent growth, averaging an estimated 1.6 percent per annum through 2018.

Suburban Maryland

Suburban Maryland’s economy has been slow-moving, with almost no growth in its biggest industries: the professional and business services sectors, which make up 20 percent of its total employment. With high industrial availabilities and weak rent growth, Ten-X Research predicts demand will continue to be outpaced by supply through 2018. Meanwhile, effective rent growth, which decelerated in the quarter, is likely to continue to inch forward at a snail’s pace.

San Antonio

Employment growth has decelerated since early 2015, and San Antonio’s economy has cooled as a result. The metro’s professional and business services sector has contributed to the slowdown while annual employment growth has decelerated to the 1 percent range from the 5 percent to 6 percent range it saw in 2014. Ten-X Research predicts that San Antonio will see nearly 1.8 msf of supply additions in 2016, boosting vacancies to 7.5 percent, rising above the national average.

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 244,000+ residential and commercial properties totaling more than $41 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions entirely online. Ten-X is headquartered in Irvine and Silicon Valley, California, and has offices in key markets nationwide. Investors in the company include Google Capital and Stone Point Capital. For more information, visit Ten-X.com.