Small Spaces, Large Demand
Over the past few years, there has been record activity in industrial real estate across the US.
Activity has been particularly strong in many southern markets and across the sunbelt states.
I’d like to discuss a sector of industrial real estate where very little is being done to fill a strong current and projected need.
This topic is important because it impacts the small-mid sized businesses in the community…the types of businesses operated by our friends and neighbors.
In several US markets, and especially across the sunbelt states, there is a strong demand for industrial buildings under 50,000 sq ft.
When many think about industrial real estate, they think of the large warehouse buildings that are hundreds of thousands of square feet.
While developers are enjoying the economies of scale of large industrial projects, over the next few years, the supply is projected to catch up with demand in several major US industrial markets.
Meanwhile, very little is being done to fill the demand for industrial buildings under 50,000 sq ft.
Adrian Ponsen, Director of US Industrial Analytics at Costar, recently gave an accurate depiction of what we have been seeing in the industrial real estate market. You can watch the full video here: Shortage of Small Industrial Spaces Grips US Sun Belt (costar.com)
Ponsen pointed to some statistics that helped articulate the need many of us have seen for small industrial real estate:
The port city, Savannah, is a good example of an area where small industrial supply and construction is not keeping up with demand. Savannah is undergoing a large expansion in industrial inventory with 30.6 million sq ft under construction. Projects under 50,000 sq ft make up less than 2% of total construction.
Across several major US industrial markets, the current vacancy rate for industrial buildings smaller than 50,000 sq ft is 2-3%.
In 2022 in major port cities like Charleston and Savannah, the average time to lease smaller industrial buildings was 2-3 months while the larger buildings took an average of 6-7 months to lease in Charleston and 10 months in Savannah.
Rent growth for small industrial buildings has been strong historically. Across the sunbelt states, small industrial real estate has had a 5-6% annual rent growth rate over the past 10 years.
So now that we see there is a need for small industrial buildings across sunbelt states, how does this apply to Spartanburg, South Carolina?
Small Industrial Real Estate in the Spartanburg Market
Spartanburg, S.C. currently has a total inventory of 107 million square feet of industrial inventory with 14.7 million square feet currently under construction.
The overall industrial vacancy rate is currently 4.0%, and the 12 month net absorption is 5.8 million square feet.
Here’s a breakdown of the industrial/flex inventory under 50,000 sq ft in Spartanburg, S.C. with available data in Costar:
|Up to 10000 SQ FT||10000-20000 SQ FT||20000-30000 SQ FT||30000-40000 SQ FT||40000-50000 SQ FT|
|Vacant SQ FT||68,700||122,000||141,000||68,000||183,000|
|24 Month Sales Volume (in SQ FT)||394,000||682,000||399,000||275,000||437,000|
|Percentage of Inventory Sold in the Past 24 months||12%||13%||10%||8%||12%|
*Remember Costar reported data cannot provide an extensive and complete list of all industrial real estate available, existing, under construction etc. Notice that the under construction 10,000 sq ft and under is 10,000 sq ft. This number is probably higher. I would suggest buildings this size under construction are less likely to get captured by Costar.
Some Points to Discuss:
- 2% of the total reported under construction industrial projects is in the 50,000 SQ FT and below category (305,700 SQ FT of the 14.7 million SQ FT currently under construction).
- The Spartanburg 50,000 SQ FT and below inventory currently comprises less than 2% of the total industrial inventory.
- While the under 50,000 SQ FT building construction percentage of 2% seems to be on par with the current inventory ratios, there is an unmet demand for small industrial buildings.
- One way to see this demand is to assess the total percentage of industrial inventory that has sold in the past 24 months.
- Of all the industrial inventory reported under 50,000 sq ft, an average of 11% (8%low and 12% high) has sold in the past two years, a fairly impressive percentage volume of sales.
A Deeper Meaning
The reason I chose to write about this topic is because the individuals most impacted by this need are the small business owners.
While developers are building to meet the industrial demands for large companies, a very small percentage of new construction is for the small industrial market.
Many of the small business’ industrial needs fall into the small industrial category.
The presence of a large company’s distribution/manufacturing can create tremendous positive economic impact for a community, but small, local businesses are a strong economic backbone of a community.
The small business dollars tend to stay more local, support other small businesses, and are the result of local entrepreneurs fulfilling their passion in life.
Without the adequate inventory of small industrial buildings, it will be more difficult for our local businesses to easily adapt to their growing and changing needs.
Source Costar Data
If you’d like to discuss this blog or anything related to commercial real estate, let’s connect.