June 23, 2022
Industrial real estate has been the one of the most sought-after property types nationally, leading to record low vacancies and increased competition among investors and tenants. When it comes to selecting a market for industrial investment, port markets are emerging as the safe bet for investors to park capital due to the positive rental growth profile, according to the real estate and investment management firm JLL.
With an average vacancy of 2.8%, port markets were well below the national average of 3.4% for industrial product at the end of the first quarter of 2022. Additionally, looking at new construction rates, 22.1% of total new inventory constructed in the industrial market during the first quarter was delivered in port markets.
JLL is a professional services firm that specializes in real estate and investment management. The company is a member of the Fortune 500 with annual revenue of $19.4 billion, operations in over 80 countries and a global workforce of more than 100,000 as of March 31, 2022. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Inc.
“Both pent-up investor and occupier demand from the pandemic along with new buildings being delivered to the market have boosted asking rents,” senior managing director John Huguenard, JLL’s industrial co-leader in capital markets, said in a prepared statement. “This ultra-competitive environment continues to drive average asking rents in port markets to new highs.”
When it comes to year-over-year rental growth, port markets saw a 23% increase in asking rent, while non-port markets rose 16% comparing the first quarter of 2021 to the first quarter of 2022.
Leading the port markets is Miami, with a whopping 53.3% year-over-year increase in rental growth, followed by Los Angeles with 45% growth, Orange County with 27%, New York/New Jersey with 26% and Boston with 22.9% to round out the top five.
While recent interest rate increases have impacted the sector, the effects on pricing and overall investor demand will not be homogenous across markets. Additionally, these coastal cities represent an attractive opportunity for investors looking to secure long-term NOI growth, despite a near 40-basis point pricing premium.
“Industrial assets in port markets are trading for a premium,” said senior managing director Trent Agnew, JLL’s industrial co-leader in capital markets. “Despite the fact that port markets are more expensive, they still present themselves as a better long-term play for investors. The lack of available land for development, as well as other barriers to new supply, is expected to drive property fundamentals well beyond 2022.”
Tenants with operations that are closely tied to ports have demonstrated commitment to their space by extending leases, causing demand surges as other tenants seek to enter the playing field. This is especially evident in the Los Angeles and Long Beach industrial markets. Additionally, markets near recently expanded ports are also experiencing the strongest growth in demand for industrial space.
“Despite a pandemic and global supply chain disruptions, many ports are seeing their busiest year ever for containers,” said Nick Rita, manager, JLL capital markets industrial research. “Southeast ports are seeing jumps in TEU volume, as congestion hinders other major ports along the West Coast.”