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October 23, 2017

If the key to real estate is “location, location, location,” then the industrial sector certainly isn’t an exception. It’s no secret the sector is outperforming many of its peers, drawing the interest of both domestic and foreign investors and closing the first half of the year with US$24 billion in sales, 20.7 percent growth over the same period last year.

But the real story is where that investment is going.

“We’re seeing capital move into secondary and tertiary markets for two reasons,” said Craig Meyer, JLL President of Americas Industrial. “First, industrial assets are the darling of the capital markets, and yields in primary markets are continuing to compress as more investors want to get involved. Second, the solid fundamentals that have made primary markets so viable are spreading across the country and into secondary and tertiary markets.”

The numbers clearly illustrate how dramatic the expansion into these markets is. According to JLL research, primary market activity accounted for 40.8 percent of sales in the first half of the year, but secondary markets (43 percent) led the way and tertiary markets (16.2 percent) showed significant growth.

Perhaps the biggest change is taking place in tertiary markets, where investment has grown 36.2 percent since 2014.

“In some land-constrained markets like San Francisco or Los Angeles, cap rates have continued to compress, rents are growing and there is very little new supply,” said Meyer. “Investors want to strike that balance between finding the right geography and getting the return they need – and smaller markets allow them to underwrite that.”

For instance, Exeter Property Group purchased a five-building, 582,541-square-foot industrial portfolio in Louisville, Kentucky for US$31.9 million from SparrowHawk Real Estate in the third quarter. Louisville has been booming, with asking rents hitting US$3.55 per square foot. Its pipeline includes 4.5 million square feet of speculative space as well as 2.3 million square feet of second-generation space that is back on the market as of H1 2017.

The ‘last-mile’ effect

While yield has been a primary driver of investors’ forays into secondary and tertiary markets, so have changes in the fulfillment industry. The trend toward one-day and day-of delivery to consumers shows no signs of slowing, making last-mile fulfillment centers a necessity for industrial investors.

This was evidenced by Canadian investor Ivanhoe Cambridge’s nearly $1 billion purchase of Evergreen Industrial Properties at the beginning of the third quarter, and Brookfield’s big purchase of a 7.6 million-square-foot industrial portfolio. Both deals had a heavy focus on last-mile fulfillment with assets in high-barrier-to-entry markets as well as secondary markets.

“The industrial sector’s fundamentals are very strong, and we don’t anticipate that changing anytime soon,” said Meyer. “Diversification into new markets and even new product types is to be expected as more investors try to join the party.”

Click to learn more about Why investors are choosing America’s secondary markets?

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Craig Meyer

President, JLL Industrial Brokerage

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