What’s behind industrial warehouse growth?
Warehouses, distribution centers, and industrial space for rent have been real estate’s hottest commodity this year. Strong tourism, construction activity and e-commerce growth in South Florida have been the driving forces behind industrial real estate growth in 2018. Increased demand for warehouses and lower area vacancy rates coupled with the strong buying power of institutional and international investors will lead to favorable market conditions for 2019.
It’s getting harder to ignore the buzz surrounding South Florida’s industrial real estate market. Thanks to local companies expanding and new-to-market tenants setting up operations in the region, absorption rates are rising, lease rates are reaching record-highs, and vacancy rates have continued to consistently decline. We anticipate these encouraging fundamentals to sustain above average market growth for the rest of the year and into 2019 and beyond.
Prominent real estate developments such as the numerous new high-rise condo and apartment buildings, along with expansion of the Aventura Mall and potential development of the American Dream Mall Miami have been at the forefront of driving interest in this market. These new projects exemplify the scope of this growing market. The expansion of Aventura Mall is attracting international travelers who come to South Florida to shop for goods that they cannot find at home in Latin America, while the potential development of the American Dream Miami is projected to be the largest mall in the U.S. upon completion. South Florida’s extensive international tourism and expanding consumer buying power are fueling an industrial boom and institutional investors are taking note.
The market is also attracting big players like Amazon with its brand new 855,000-square-foot distribution center serving Miami, which is a strong vote of confidence in the local market that institutional investors are noticing. Demand for well-leased industrial properties remains extremely high among investors, as 34 sales totaling almost 3.7 million square feet occurred during third-quarter 2018. But what exactly is it about South Florida that has developers and investors so excited?
The majority of industrial users are seeking space to house merchandise for both brick and mortar retail and e-commerce facilities. The proximity of local transportation centers streamlines the logistical efficiency of the packing and distribution process for these stores. With its international airports, abundant access to railroads, and the recent Panama Canal expansion, South Florida is quickly becoming a highly desirable market, with occupancy hovering around 96 percent.
Promising Florida Market Conditions
The tight market has also prompted developers to build numerous speculative and build-to-suit projects such as the Eastview Commerce Center. This ambitious project is a six-building, 800,000 SF project that is being developed on a former golf course in an infill location close to the I-95. The project is being developed by Panattoni Development Company in partnership with the California State Teachers Retirement System. The project is seeing significant interest from companies looking to relocate to brand-new, state-of-the-art buildings that are in close proximity to the airports and seaports in Miami and Fort Lauderdale.
The third quarter of 2018 marked more than eight years of steady growth for South Florida’s industrial market, as demand outpaced supply for the 34th consecutive quarter. Industrial rents continued to rise throughout the region, as landlords push rents closer to the $8.53/SF record set back in 2007.
So far in 2018, there have been 79 sales for 7.9 million square feet worth $977.6 million. This performance is similar to last year’s, when 7.9 million square feet sold for $844.2 million. The average sales price on investments increased to $125/SF from $111/SF one year ago. Investors remain bullish, as sales of premier industrial properties have reached record-breaking levels. For example, Duke Realty recently acquired three newly constructed and fully leased buildings from Flagler Development in Countyline Corporate Park. The properties total 1 million SF at and sold for $180 per square foot, which equates to a 4.2% capitalization rate.
Some question if the strong leasing trend of new warehouse buildings will continue, or if the market will see rising vacancies if economic conditions slow down in the near future. Either way, strong market fundamentals and robust ties to Latin American and Caribbean Island distribution should lessen the impact on South Florida if a future slowdown materializes.