REQUIRED READING: Tertiary Markets Emerge As New Industrial Hot Spots

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The landscape in the industrial real estate world is as fast-moving as the global trade and world economies that drive it. One thing that you can count on is that today's hot market will be something different tomorrow or the next day. The industry is in a fluid state as it constantly adjusts to the action within trade dynamics.

Currently, industrial markets in the Los Angeles region, Chicago area, Toronto, New Jersey, Atlanta and Dallas are seeing continued growth because of their size and depth, close proximity to major transportation, labor pools, rail intermodalism, inland port infrastructure, air cargo and trucking centers. It is no coincidence that those resources are all the major components of the global supply chain.

In addition, those industrial regions are favorites of the capital markets because of their depth and history of successful, long-term large projects that help assure future development and provide the capital markets a case of consistent investing.

When a developer comes to an institutional joint venture partner or a lender for the construction of an $800,000 speculative building, for example, the plan is an easier sell in a strong industrial market because the new property would be just one of many others that have been built successfully in the subject market.

With that said, however, there are many factors coming into play that are bucking the trend of the six largest markets – namely, global trade and its role in creating strategic new and emerging markets. One of the significant components of the supply chain is seaports.

Recently, seaport markets have caught the attention of everyone, from the institutions to the national developers to the large occupiers – especially the retail occupiers like Wal-Mart, Target and IKEA, to name just a few.

As a result, we are in the midst of the new era of growth for the tertiary markets, including Norfolk, Va.; Savannah, Ga.; Charleston, S.C.; Jacksonville, Fla.; Oakland, Calif.; Seattle; and Tacoma, Wash.

These new markets are on everyone's radar screens precisely because they are homes of strategically located seaports and adjoining rail centers – and will become increasingly important in the growth of global trade and its route to North America.

In the world of supply chains, the one consistent impediment to success is congestion. Enter the tertiary markets: As the larger markets become overly saturated with traffic and people – and face growing congestion – developers are forced to move further from the more central areas of concentration to the airports and major modes of transportation.

If one occupies a distribution building just a few miles from a major international airport, for example, and relies on time savings and efficiency to get to and back from the airport in some of the larger markets, transportation may become too time-consuming due to the area's congestion. The entire supply chain process is thus disrupted.

Population growth is among the dynamics that are influencing the rise of industrial markets in Tampa, Fla.; Las Vegas, Orlando, Fla.; Jacksonville; and other cities.

The West Coast seaport markets, meanwhile, benefit from their proximity to the Asia trade routes, and cities assured of future growth include Oakland, Seattle, Tacoma and the Vancouver, British Columbia, area (Port of Prince Rupert). In addition, Oakland and Prince Rupert feature rail routes connecting them to the Midwest area of the U.S. – which again gives those markets strategic value in helping to meet the global trade demands.

Market cautions
The downside from the institution and developer side of accessing, investing and developing in an emerging market is that these areas do not have the depth to absorb softness in the economy that a major market could handle.

Additionally, the smaller emerging markets are unlikely to have the long list of major successful projects that more significant markets like Chicago or Southern California would have. In some cases, an emerging market will not have the same infrastructure in place that one could find in a larger, more mature market, such as Dallas or Atlanta.

But what the emerging markets do have is global trade trends in their favor, and in most cases, the politics of these emerging markets are such that pro-growth views are taking effect to meet the globalization of the seaport markets.

The industrial market in general continues to expand, as import growth is primarily fueled by the more cost-effective production of consumer goods offshore, and exports have increased as a result of the weakening dollar and the strong economies of our trading partners.

While the outlook still looks favorable over the long term for the economy and consumer, there are short-term risks, including the likelihood of the higher interest rates and the potential for a weaker housing market to damage liquidity in financial markets. There are also minor risks of oversupply in the large distribution markets that could stall positive rent traction.

Jim Dieter is an executive managing director with CB Richard Ellis (CBRE), where he is currently responsible for leading CBRE's National Industrial Group. Dieter can be contacted at (847) 706-4031 or jim.dieter@cbre.com.

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