There has been a lot of speculation over what aspects of real estate are growing, and which are not. Some experts say that the number of homebuyers will increase, and others say that renting will continue going strong. One trend that has been observed in commercial real estate, is a decline in a specific type of CRE, industrial real estate.
The Current Industrial Real Estate Landscape
Nashville, Dallas, and Boston each rank within the top 6 for real estate investment potential in a report published by the Urban Land Institute. These fast growing cities have a lot of ongoing real estate development, but despite their thriving commercial real estate market, they are each beginning to run out of space for industrial real estate.
Holladay Properties is currently working in Nashville to construct a warehouse and distribution park. The five industrial buildings that make up this park will be located near the Nashville International Airport, and are currently being described as one of the last industrial projects of its size.
Many developers prefer to use available land for the development of office space, retail space, or residential space. This is because the potential rental fees are higher with these types of tenants. Steve Horrell, an industrial broker and development consultant in Nashville, referred to the rent earned through industrial properties as “the lowest rung on the totem pole”. With the profit incentive for non-industrial development outperforming industrial properties to this degree, the majority of available land ends up being taken for alternate commercial purposes.
Declining Industrial Space
With land being bought up for smaller, non-industrial projects, the warehouse and distribution park is considered to be one of the final industrial projects of its size. It is not just Nashville that is experiencing this, but Dallas and Boston as well. Not only is industrial real estate growth stalled in these cities, but over the last decade, Dallas has actually been demolishing or converting industrial properties. In Boston, there have been even larger losses in industrial space. Richard Lawson, a writer for CoStar, reported on this, saying that:
The east Dallas area, which includes the popular Deep Ellum neighborhood that once was the main industrial area, has had a “net reduction of about 500,000 square feet of industrial space since 2008,” according to CoStar’s Dallas market report.
Reporting on the situation in Boston’s major industrial areas, Lawson stated:
More than 20 million square feet has been dropped from that area’s industrial inventory in a decade, according to CoStar’s Boston market report. Now the trend is spreading to the more popular warmer climates across the United States.
Though they were once considered to be industrial powerhouses, the industrial space in these fast growing cities is projected to continue falling. Steve Horrell analyzed the current state of industrial real estate in Nashville by saying, “We’re pretty well out of dirt to build anything 5 to 7 miles’ from the county courthouse in downtown Nashville…We’re chewing up industrial buildings in our own neighborhoods for other uses.”
Horrell also added that it is “difficult for companies wanting 5,000 to 15,000 square feet to find space, particularly as older, existing buildings disappear”. CoStar analyzed the gains and losses in the industrial market, and found that Davidson County (the county that Nashville belongs to) has seen a net loss of industrial real estate in the last decade. There were approximately 3 million square feet of industrial projects developed in the county across that decade, while about 3.36 million square feet of industrial space was demolished or converted.
The Future of Industrial Real Estate
While the presence of industrial projects in cities is beginning to disappear, that does not mean that these projects will cease to exist in the coming future. With the growth of Amazon and other online shopping companies, warehouses have become even more of a necessity. The locations of these warehouses end up being pushed just outside of major cities. This is done so that the valuable city land can be used for more profitable (higher rent) properties like the aforementioned offices and residential spaces.
Looking at the areas outside of Davidson county, there is a lot more available space for industrial development. This means that the future of industrial real estate will most likely involve moving out of big, fast growing cities, and settling down in the surrounding counties. The need for industrial development isn’t going to disappear, it is just moving to a location that allows its profitability to compete with other forms of commercial real estate.
Large industrial development projects will not be frequently seen in big cities moving forward. It is more valuable to the development companies to build that space into one that provides higher rental fees from future tenants. However, while the available land for industrial real estate declines in fast growing cities, it will not disappear completely. The demand for industrial real estate still exists, so instead of dying out, industrial development projects will simply move outside of major cities where industrial space still exists. This is likely to be the trend moving forward.