Ten-X, the nation's leading online real estate marketplace, released its latest U.S. Industrial Market Outlook, including the top five "Buy" and "Sell" markets for industrial real estate assets. The report found that the sector continues to benefit from many of the technology-driven shifts that are challenging the retail and office sectors such as rising consumer dependence on e-commerce and mounting demand for data centers to support cloud computing.

The forecast indicates that Los Angeles, Nashville, Tenn., San Diego, Portland, Ore. and Sacramento, Calif. are the top markets in which investors should consider buying industrial assets. Notably, four out of the top five "Buy" markets are in the western region with Southern California in particular benefiting from trade flows with China and Trans-Pacific commerce. However, the report cautions that the current political environment casts some uncertainty over the region's recent trade benefits.

Ten-X also pinpointed Dallas, Baltimore, San Antonio, Suburban Maryland and Columbus, Ohio as the five markets where investors should consider selling industrial properties. While many of these markets boast solid economies and currently healthy industrial sectors, large supply pipelines and other factors leave them exceptionally vulnerable in the event of an economic downturn. 

Nationally, Ten-X Research found that robust absorption has helped drive industrial vacancies down to just 7.6 percent - their lowest levels since 2000. With both supply and demand expected to soften through 2018 as the economic cycle matures, vacancies should bottom out in the mid-7 percent range. Rent growth has held steady in the mid- to upper-2 percent range over recent years, boosting rents across the sector to a historic peak. E-commerce continues to drive growth and demand for warehouse and distribution space. The increase in cloud computing is also creating an unprecedented need for data centers.

While oil prices have rebounded in recent months, they continue to hover around $50 a barrel, limiting the energy industry's contributions to growth in the industrial sector. Their incremental rise has allowed for capacity utilization to trend upward over the course of the year. Industrial production has also seen a spike to its highest levels since 2014, though the increase is not the primary driver of the sector's current success.

The report also noted trade flows have steadily improved over the course of the year, in part due to a resurgence in Asian intra-regional shipments and recovering import demand in North America. However, significant risks remain from protectionist policies, rising geopolitical tensions and a mounting toll from a series of natural disasters. While the Trump administration remains unsettled on a concrete tax plan, its decision not to pursue and pass a border adjustment tax is an encouraging sign for future trade growth. 

"More than any other class of commercial real estate, the industrial sector has reaped the benefits of an economy and culture that is becoming more and more dependent on modern technology," said Ten-X Chief Economist Peter Muoio. "Despite a prolonged slump in oil prices, these secular trends are boosting the segment. While much of commercial real estate's future appears murky, the outlook for industrial remains strong."

National industrial deal volume rose to $15.8 billion during Q2 2017, a 14.4 percent increase over a year earlier. Pricing across the sector rose to $80 per square foot during Q2 hitting an all-time peak. Ten-X Research forecasts that effective rent growth will exceed 3 percent through 2018 – the first time it will have topped that figure during the current cycle. Absorption is projected to turn negative in the event of a cyclical downturn, which would push vacancies back into the mid-9 percent range by 2020. However, this vacancy level would be well below that of previous downturns.  Rents are set to remain unchanged during a downturn.

The Industrial Sector's Top Five "Buy" Markets:

Los Angeles

Robust demand for industrial properties has strengthened Los Angeles' appeal to investors, outpacing completions by a wide margin and driving vacancies down to 3.2 percent in 2016. Even as the city's economy is slowing, total employment remains near peak levels and the construction sector is enjoying healthy annual job gains of roughly 8 percent. Population continues to rise but after a 0.3 percent increase in 2016, the pace of growth has now slowed for five consecutive years. Ten-X Research expects industrial rents to continue to grow through 2021, though at a slower pace during the modeled recession scenario beginning in 2019. The combination of steady rent growth and low vacancies is expected to drive annual NOI growth of roughly 3 percent through 2021.

Nashville, Tenn.

Nashville's favorable investment outlook can be partly attributed to robust employment and population growth. Nashville's population jumped 2 percent in the past year – the third year in a row to record this level of growth – while total employment has climbed by 3.1 percent in the same timeframe. The city's 3.3 percent unemployment rate also compares favorably to the national average. Strong industrial demand has pushed rents to an all-time high, while vacancies are projected to shrink to an all-time low of just above 3 percent by 2018. Rent growth is expected around the mid 4 percent range through 2018. Although Ten-X Research sees vacancies climbing above 6 percent based on a 2019-2020 recession model, they will edge lower as demand returns in 2021. Overall, net NOI growth should average approximately 2.9 percent per year over the next four years.

San Diego

While San Diego's strong economy has shown recent signs of slipping, its industrial prospects remain among the brightest in the country. After several years of above-average performance, the city's job growth is now tracking well behind the U.S. pace. Unemployment has held above the national average while population growth has slowed to 0.8 percent in 2016. Industrial vacancies are currently near 6 percent – a low for the current cycle and significantly below national levels. Rent growth hit a cycle-high 2.8 percent in 2016, and should continue to increase through 2018 as the local supply pipeline remains manageable. While an expected downturn in 2019-2020 would cause vacancies to rise and rent growth to contract, NOI growth should nevertheless average 2.5 percent annually through 2021.

Portland, Ore.

High 2 percent range job growth boosted Portland's outlook as well as 1.7 percent population growth - Portland's fastest pace in 10 years and more than twice the national average. The city's main employer has been the transportation and utilities sector, which added jobs at a cycle-high rate of 6.8 percent in the past year. Strong demand for industrial space has managed to outpace the city's strongest supply pipeline in 15 years. Rents are forecasted to rise by an average of 3.5 percent annually through 2018. Despite the 2019-2020 recession scenario predicted by Ten-X Research, Portland's robust rent growth and below-average vacancies will yield average annual NOI growth of 2.7 percent through 2021.

Sacramento, Calif.

Peak population and employment levels make Sacramento an appealing market for industrial property investors. The city's population has outpaced that of the country for over 20 years and jumped 1.3 percent last year alone – a cycle-high mark. While employment growth has slowed, it remains on par with national levels and the city's total employment is 5 percent above its pre-recession peak. The sectors driving job gains include transportation/utilities and education/healthcare in which jobs climbed 4.2 percent and 6 percent, respectively, over the past year. The city's industrial demand has stayed well ahead of supply and Ten-X Research expects this to continue through 2018 with vacancies falling below 10 percent and driving annual rent growth to 2.7 percent. Factoring in Ten-X Research's 2019-2020 recession scenario, the city's average annual NOI is forecasted at 2.5 percent through 2021.

The Industrial Sector's Top Five "Sell" Markets:

Dallas

Dallas' economy remains strong with annual employment growth of nearly 3 percent and low unemployment and population gains that have outpaced the U.S. average for a quarter-century. The city earns its place atop the "Sell" list due to an overwhelming supply pipeline that promises to wreak havoc on the city's industrial market in the event of an economic downturn. Under a cyclical downside scenario, the unprecedented industrial demand is forecasted to decline steeply in 2019, returning 60 million square feet of space to market and sending vacancies back to recessionary levels. Rents are also expected to decline through 2021, while NOI should grow through 2018 before facing contraction in the next three years.

Baltimore

Baltimore's economy is struggling as it continues its slow recovery since the recession. While jobs are at an all-time peak, the pace of growth has fallen behind national levels and unemployment is just above the national average at 4.4 percent. Population growth is at its lowest level in at least 25 years. While area industrial properties currently enjoy a vacancy rate of just over 10 percent – the market's lowest figure on record –  weakening fundamentals are likely to have a large impact in the event of a cyclical downturn in 2019-2020. Current models indicate vacancies would exceed 12 percent by 2021, while slowing rent growth will flatten NOI to annual rate of just 0.9 percent over the same period.

San Antonio

While overall jobs, unemployment and population growth figures in San Antonio remain strong, projected negative absorption and a steady pipeline of new supply paint a bleaker picture for the city's industrial sector. Vacancies currently measure just above 7 percent – up slightly from a cycle-low of 6.9 percent in 2015 – and are projected to climb to the mid-9 percent range with the arrival of new supply and the impact of a potential economic downturn in 2019-2020. Rents have surpassed their prior peak and should continue to grow through 2018 before contracting over the following three years. While vacancies should begin to decline in 2021, annual NOI growth is expected to average only about 1 percent annually in the interim.

Suburban Maryland

Suburban Maryland's economy has rebounded over the last few months but that has done little to reverse much of the region's long-term decline. Employment in the region's wholesale trade sector has declined nearly 25 percent since 2007, significantly harming the industrial arena. The area also struggles with lagging population growth only measuring lower than 1 percent each of the last three years, trailing the national average. Industrial deliveries and demand were at cyclical highs in 2016 which should help reduce vacancies to 9.2 percent by 2018, according to Ten-X Research. However, under the recessionary scenario negative demand should increase vacancies by roughly 200 bps by 2020. NOI growth is expected to expand through 2018 before contracting and eventually flattening in 2021 as vacancies remain high.

Columbus, Ohio

Columbus' demographics remains a bright spot in the Midwest, as strong growth in the city's manufacturing and construction sectors have created jobs and fueled healthy population growth. Industrial vacancies have fallen to the 8 percent range as steady demand has helped absorb a spate of new supply, while rents have now risen for five consecutive years. However, if the economy were to turn, demand is expected to revers, driving vacancies back above 9 percent and halting rent growth. Annual NOI growth is forecasted at just 1.1 percent through 2021.