MSAs on the Rise for Industrial

A look at what industrial real estate has done over the past five years in New York, Los Angeles, San Francisco, Chicago and more.

Industrial real estate has experienced strong growth over the last five years, but potential shifts in the marketplace could make maintaining this growth a challenge. There has been a notable increase in industrial real estate since 2014, especially in major markets.

Primary markets have experienced significant growth in price, mainly due to a rising trend in investment activity. Conversely, most secondary markets have shown a decrease in price, but there are several that have held steady or exhibited some uptick.

Key Takeaways:

Reonomy looked at statistics from heavily transacted MSAs, including the primary markets of New York, Los Angeles, San Francisco, and Chicago, as well as data from secondary and tertiary markets. The average sales prices in these MSAs pointed toward increasing prices in primary markets, as well as a few secondary markets.

The biggest factor believed to contribute to this increase is the rise of investments in industrial properties, mostly within the primary markets. However, the data has also shown that the proportion of investment in all three markets (primary, secondary and tertiary) has remained roughly the same between 2014 and 2019.

According to NARⓇ, the type of property is a deciding factor when it comes to the future of industrial real estate. The strongest increase in construction and demand has been in apartments, hotels, and industrial warehouse properties, while a decrease has been evident in retail malls, offices, and commercial structures.

Where is the Industrial Real Estate Market Heading?

Most of the largest sales price increases in the industrial real estate market over the past five years have been in the primary markets, growing from about 3.9 million to over 5.5 million between 2014 and 2019. Major markets like New York and Los Angeles have seen a very steady and continued rise. The secondary markets have seen a slightly smaller increase, going from roughly 2.4 to 3.4 million in the same five-year span, and experiencing a dramatic rise and fall between 2016 and 2018.

The average price skyrocketed from just under 3 million to over 4 million and then dropped below 3 million, all within a two-year period. Lastly, the tertiary markets have held pretty steady since 2014, hovering right around 1.7 million. The number of sales remained pretty steady across all markets during the five-year period.

Average Sale Price by MSA

Here’s a more specific look at the 9 MSAs that experienced high growth during a five-year period from 2014 to 2019 (ranked by total # of sales):

New York – Newark – Jersey City (NY, NJ, PA) (Primary Market)

This MSA has by far experienced the most gradual increase in pricing over time, with little to no decreases during the five-year period that we looked at. In 2014, the average sale amount for industrial assets in this MSA was roughly $2.45 million. By 2019, that figure reached nearly $3.1 million, showing an increase of $617,439 from 2014.

Los Angeles – Long Beach – Anaheim (CA) (Primary Market)

In 2014, the average sale amount in the Los Angeles – Long Beach – Anaheim, California MSA was $2.8 million. This figure rose to nearly $3.2 million by 2015 before experiencing a slight drop in 2016, down to $3.09 million.

The decrease was short-lived, and by 2017 pricing jumped back up to $3.24 million and continued to rise through this year, where it reached $3.5 million. The increase was largely fueled by increased demand driven by e-commerce that began in 2018 and drove up lease and purchase prices.

Chicago – Naperville – Elgin (IL, IN, WI) (Primary Market)

This MSA has experienced a bit of a yo-yo effect over the five-year span that we studied, ultimately resulting in an overall decrease in average sales pricing by 2019. The average sale amount in 2014 rested at roughly $2.3 million, and then it dropped to $2.2 million by 2015, only to make a significant jump in 2016 up to $2.5 million.

This MSA reached its peak in 2016, due mostly to foreign investors that were attracted to Chicago’s booming industrial activity at the time. Afterward, there was a gradual decrease, ultimately falling to a low of $2 million by 2019.

Atlanta – Sandy Springs – Roswell (GA) (Secondary Market)

Between 2014 and 2018, this MSA experienced an increase in the average sale amount, going from $1.99 million to $2.18 million. However, by 2019 the average sales price dropped below its starting mark, all the way down to $1.91 million. The decrease did not occur all at once; it began in 2017 when the average sales amount reached its peak of $2.33 million. Whether this decrease will continue or the amount will plateau remains to be seen as we see demand growth slow in line with an economic downturn.

Miami – Fort Lauderdale – West Palm Beach (FL) (Secondary Market)

This MSA has experienced some dips over the years, however, a very significant boom in 2018 has kept the overall figure on the rise. The 2014 average sales amount was $1.5 million. This dipped slightly in 2015, but then it rallied in 2016 up to $1.7 million. There was another slight dip in 2017, but the number jumped within one year to $1.9 million in 2018.

The important thing to consider in this market is, even though it has experienced overall pricing growth between 2014 and 2019, the latest activity shows another drop, with pricing hitting $1.6 million in 2019. This decrease of more than $350,000 in the past year could be just another dip in the up and down pattern that this market has experienced, but it definitely is the largest decrease, which could indicate that this market is beginning to slow, keeping pace with the U.S. economy. Another consideration is that the vacancy rates for industrial properties in this area are slightly up, which could play a role in the decrease of the average sales amount.

Philadelphia – Camden – Wilmington (PA, NJ, DE, MD) (Secondary Market)

There has been an overall increase in average sales prices in this MSA, however, it has also experienced several drops over the five-year period. In fact, pricing grew by roughly $33,000 from $1.5 million in 2014 to $1.85 million in 2017, only seeing a slight dip in 2015 before increasing to $1.7 million by 2019.  This begs the question since the decrease has grown over the past two years, will this market continue to see a decline, or is it just settling down from the industrial boom? If the latter is the case, then this figure will hold steady — which is still an overall increase over the five-year period.

Phoenix – Mesa – Scottsdale (AZ) (Secondary Market)

This MSA seems to follow a similar pattern as the Miami – Fort Lauderdale – West Palm Beach MSA, experiencing a gradual decline each year, but the overall five-year average sale price shows an increase thanks to a boom in the industrial arena in 2018. The average sales amount in 2014 was $1.89 million. This figure dropped slightly each year through 2017 when it hit a low of $1.804 million.

This number shot up to $2 million in 2018, with the industrial boom that many markets experienced, and then by 2019, it had dropped to $1.9 million. This does not necessarily indicate a downward trend as much as the market returning to a sense of normalcy following years of increased activity and prosperity.

San Francisco – Oakland – Hayward (CA) (Primary Market)

This MSA has experienced an overall increase in the average sales amount of approximately $835,371, showing the largest price increase in the primary markets that we looked at closely. It experienced impressive growth between 2014 and 2016, increasing from $2.7 million to $3.34 million, then dropping almost $246,000 in 2017.

The surge that many markets witnessed in 2018 held true here as well, shooting the average sales amount up to $3.6 million. When this amount dropped to roughly $3.56 million in 2019, the overall result during the five-year period was a large increase in the average sales amount.

Minneapolis – St. Paul – Bloomington (MN, WI)

Of the 9 MSAs that we concentrated on between 2014 and 2019, the largest increase in average sales amount was found in this secondary market. According to Cushman & Wakefield, there has been an overall decrease in vacancy rates in the industrial sector in Minneapolis/St. Paul, yet tenant activity remains on the rise. This has kept construction demands high for industrial properties.

In 2014, the average sales amount in this MSA was $1.7 million, and except for a slight decrease of about $210,000 between 2015 and 2016, that number has grown to $2.68 million in 2019. That means that even with an over $200,000 decrease during the five-year period, this market still shows one of the highest overall increases in average sales prices.

Will There Be a Continued Demand for Industrial Real Estate?

Since the number of sales seems to be slowing, it is reasonable to question if there will continue to be a demand for industrial properties. The short answer is yes; there will be a demand but not necessarily demand growth.

The driving force behind the demand for industrial real estate will be e-commerce sales, according to Deloitte, thanks to double-digit growth in this sector. This comes from companies that are solely online as well as brick-and-mortar companies that are expanding their online presence, proving that physical retail is not dead.

The demand for industrial real estate is expected to increase by 850 million square feet by 2023. Plus, since the Federal Reserve cut interest rates, this makes loans more attractive to potential investors that want to get into the industrial market. These combined elements could cause prices in these MSAs to continue their gradual climb.

Lower Interest Rates Come with a Downside

Lower interest rates may make loans more appealing, but it could also drive up the cost of products and materials, thereby increasing the cost of capital. Increased construction costs, coupled with rising availability rates, could tend to lower demand growth, overall. As the U.S. economy slows over the next year, it is not surprising that industrial real estate will mimic this trend.

If prices remain high in the primary markets, investors will start to focus more on the secondary markets, especially those few that have shown double-digit growth and significant price increases over the past several years, like Minneapolis, thereby driving these markets upward. The question is, will this trend continue if we move into an economic slowdown, or will investors seek the security that comes with the larger markets?

The Outlook

The industrial real estate market will remain relatively stable, although demand growth will likely begin to slow. The main driving force behind demand will come from e-commerce, while investors will continue to play a large role in the direction the market takes.

As the U.S. economy experiences a slowdown, we can expect industrial real estate to do the same. However, if demand stays constant thanks to e-commerce, a continued increase in the average sales price is a strong possibility within the primary and secondary markets that we studied.

For more information on deciphering data and unlocking commercial real estate opportunities, visit our blog at Reonomy.

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