A Closer Look at Industrial Investments in Secondary Markets
Although investment in primary markets still dominates, secondary industrial markets could provide higher returns.
As cap rates continue to compress across the country, especially in large markets, commercial real estate investors are looking to invest in secondary or even tertiary markets. This trend is also noticeable in the industrial real estate sector, as the barriers to entry in major primary markets remain high.
In the Inland Empire and Northern New Jersey, the country’s two largest markets, cap rates are falling too. Northern New Jersey fell to a range of 2.75% to 3% in the second half of last year, CBRE’s semiannual cap rate survey reported. While the Inland Empire, reported the lowest yields across the country, at 2.5% to 2.75%.
Attractive Next Tier Industrial Markets
With investors seeking higher yields, these major markets may no longer appeal as much as they used to. But, as industrial cap rates are declining everywhere — and by more than in any other property sector in 2021 — is there anywhere investors can find a good return?
It turns out, smaller but strategically located markets may be the answer — especially those in the Midwest. Indianapolis offers a good example. While acquisition yields there may not be staggeringly high — CBRE pegs them at between 4% and 4.25% in the second half of last year — the market’s astonishingly high demand, alongside a constrained development pipeline, means that a return on investment in Indiana’s capital is very likely to yield a strong return on investment should these trends persist. JLL’s first-quarter report on Indy shows that vacancy for the metro has fallen below 4% for the first time ever, supercharging rent growth to hit 14% year over year.
It’s not just Indianapolis, though. Many Midwestern cities are experiencing similar phenomena, owing to good geography, a highly developed network of highways and freight lines, and plenty of available land for development. Cleveland strikes a similar chord, for example, with vacancy of 3.5% following a stunning 2.8 million square feet absorbed in the first quarter of this year alone. And cap rates there are significantly higher than many other markets, falling between 5.5% to 5.75% last year.
Safer in the Primaries?
Despite all of this, however, many major investors are just fine focusing on the traditionally primary industrial markets, as they see industrial markets near major ports as the safest plays. Even if it does mean shelling out more per square foot, those assets are continuing to appreciate as well.
A May report from Yardi Matrix highlights total transaction volumes by industrial market, and the focus is clear. Of the $18.6 billion in industrial transactions closed between January and April, the highest volumes were in the large markets you’d expect to see at the top of the list. Chicago, Los Angeles, Phoenix, New Jersey, and, yes, the Inland Empire, were all among the top 10 markets for industrial deals.
Related Questions
What are the benefits of investing in industrial properties in secondary markets?
Investing in industrial properties in secondary markets can be a great way to earn a strong return on your investment. These markets often have limited land available for development and soaring demand, which can lead to higher rental rates and increased tenant demand. Additionally, industrial properties in secondary markets may be priced lower than those in primary markets, allowing investors to purchase them at a discount and then reposition them to bring them up to speed. This can be a great way to add value to the property and earn a higher return on investment.
For more information, check out this article from Commercial Real Estate Loans.
What types of industrial properties are best suited for secondary markets?
Secondary markets are best suited for industrial properties that are in good condition and have a stable tenant base. This includes warehouse/distribution centers, refrigeration and cold storage centers, flexible buildings, heavy manufacturing buildings, light manufacturing buildings, and data/communications centers.
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What are the risks associated with investing in industrial properties in secondary markets?
Investing in industrial properties in secondary markets can be risky due to the lack of tenant demand and limited access to transportation corridors. In addition, the lack of modern amenities and infrastructure can make it difficult to attract tenants and increase the value of the property. Furthermore, the lack of development in secondary markets can make it difficult to reposition a dated industrial facility, which can limit the potential return on investment.
For more information, please see What to Know Before Making Your 1st Industrial Property Investment.
What are the financing options available for industrial properties in secondary markets?
For industrial properties in secondary markets, there are a variety of financing options available. These include CMBS, Life Company, Bank Loans, and Small Balance Loans. Loans start at $1,000,000 with amortizations as long as 30 years and leverage up to 75%. For more information, our advisors can connect you with a wide variety of lenders to get a quote at no charge.
What are the tax implications of investing in industrial properties in secondary markets?
Investing in industrial properties in secondary markets can have a variety of tax implications. Generally, investors should expect to pay property taxes on the property, which can vary widely across a target market. It is important to research the property tax situation in the area of a potential investment, as this can have a significant impact on the profitability of the investment. Additionally, investors should be aware of any potential increases in property taxes in the near future, as townships or municipalities facing financial hardships may raise taxes as needed. It is also important to work with a qualified tax professional who understands the field and can help you reduce your levels of stress and use the best strategies when it comes to taxes and your property.
What are the best strategies for finding industrial properties in secondary markets?
The best strategies for finding industrial properties in secondary markets depend on the type of property you are looking for. For example, if you are looking for a build-to-suit industrial development, you should consider working with a commercial real estate financing advisor to help you find the best financing options. Additionally, you should research the local market to identify potential opportunities and look for properties that are priced competitively. You should also consider working with a local real estate agent who can provide you with insights into the local market and help you identify potential properties.
It is also important to consider the fundamentals of the local market when investing in industrial properties in secondary markets. According to a survey conducted by Multifamily.loans, most investors prefer to buy in suburban areas in primary or secondary markets. Therefore, it is important to research the local market to identify potential opportunities and look for properties that are priced competitively.
For more information on financing industrial properties, you can visit Commercialrealestate.loans and get a free quote by entering your details in the form provided.