In the last year, tariffs and economic uncertainty derailed activity in the industrial sector. In major metros, opportunistic buyers and owner-users are driving industrial investment activity. Dig a little deeper, however, and investors may also find attractive opportunities in smaller metros. Cities like Lafayette and Baton Rouge, LA, and Birmingham, AL offer investors strong fundamentals that currently outpace the national average.
Investors have an opportunity to diversify within the industrial asset class and find healthy yields, according to Evan Scroggs, president and managing principal of Lee & Associates in Louisiana, and Brian Knowles, founding principal and acting president of Lee & Associates Eastern Pennsylvania. However, there is a learning curve to vetting and investing in these markets.
The Hidden Value of Tertiary Markets
Tertiary markets are presenting an attractive opportunity for industrial investors to unlock value. These markets offer a more attractive cap rate by 100 to 150 basis points compared to major markets, according to Scroggs, and they have more attractive fundamentals, like a tighter vacancy rate, limited new construction and extended growth runway.
"Investors can find better yield in secondary and tertiary markets," says Scroggs. "Unfortunately, the story hasn't gotten out yet, and so the market at large doesn't understand." Scroggs focuses on markets in Louisiana, which includes Baton Rouge, New Orleans and Lafayette. These markets have a vacancy rate trending 400 basis points below the national average and limited new construction. Many secondary and tertiary markets follow this pattern.
Overall, Knowles expects the so-called "smile" markets to lead industrial growth this year. That includes larger markets like Las Vegas and Phoenix in the West and Texas, Florida and Eastern Charlotte in the East. Tertiary markets like Lafayette and Birmingham sit within the region but offer higher yield prospects for the right investors.
While opportunistic buyers and institutional investors are the most active in major metros. The properties in these markets best align with private investment strategies.
Following the Fundamentals
Beyond the vacancy rate and the new supply pipeline, investors should carefully evaluate the economic drivers when considering investment in a secondary or tertiary market. Scroggs notes that port activity; the presence of core industrial industries, like petrochemical, plastics and pharmaceuticals; access to resources like natural gas; and access to alternative industrial assets, like data centers and outdoor storage, are all indicators of a robust and active market, even if that market is small. Often the strength of these fundamentals illustrates the positive return potential in these markets.
"Demand for space in these markets is multi-faceted," says Scroggs. "As you dig down and you look at the drivers, this is probably what would be the most helpful for developers or investors. They need to understand the local economy, the tenant profile and the demand for space."
In addition to looking at the economic drivers in a market, Knowles recommends going back to basics when considering investment in a tertiary market. "Find a strong property in a strong location with good brick," he says. "Think 'second-generation space.'"
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