Investing in Miami: A Deep Dive into the Industrial Sector

Overview

1. Annual Net Absorption Decrease: Miami’s annual industrial net absorption has significantly decreased to over 3.4 million SF from an elevated level of over 8.2 million SF leased through the second quarter of 2022, indicating a slowdown in the second quarter of 2023.
2. Tight Vacancies Amidst Economic Slowdown: The market is experiencing tight vacancies at 2.2%, well below the U.S. average of 4.9%, due to limited availability of existing space and a slower economic environment impacting lease volume.
3. Elevated Construction Activity: Despite a scarcity of developable land sites, construction activity remains high, with over 4 million SF set to deliver in 2023, following high levels of deliveries in 2022 and 2021, with new space over 98% occupied.
4. High Industrial Pipeline: With over 8.6 million SF underway, Miami boasts the second highest industrial pipeline in Florida, trailing only Orlando, yet modern logistics space still needs to be explored.
5. Lowest Vacancy Rates in Florida: Miami enjoys the lowest vacancy rates among Florida’s most significant industrial markets and strong annual rent gains, though growth has moderated from previous highs.
6. Critical Logistics Hub: Miami’s strategic position, serving a large population pool and being a gateway market to the world, ensures sustained healthy tenant demand, keeping market vacancies below 3%.
7. International Shipping and Cargo Traffic: Miami International Airport and the Port of Miami, both significant for international shipping and cargo traffic, bolster Miami’s role as a critical logistics hub, attracting importers and exporters.
8. Sales Volume and Transaction Pricing Adjustments: After a historic boom, sales volume and transaction pricing have adjusted back to pre-pandemic levels, with a notable decrease in the first half of 2023 and a pricing correction influenced by rising interest rates.
9. Change in Property Trading Composition: The average square footage of traded properties has decreased, with fewer larger properties trading, reflecting a shift in the market dynamics.
10. Investor Interest and Market Price Appreciation: Despite rising interest rates and economic slowdown, strong investor demand over the last two years has led to record market price appreciation, significantly above the U.S. average, though future challenges persist with cap rate uncertainty.

Absorption Trends and Vacancy Rates

Net absorption in Miami has slowed to 3.4 million SF in the past year. This is below the five-year average of 4.7 million SF. Absorption exceeded deliveries for 11 quarters until Q2 2023. Vacancies slightly increased from 1.9% to 2.2% in 2023, remaining below the U.S. average.

Focal Points for Large Leases

Over 70% of large leases were in Outlying Miami Dade and Medley. These leases spanned ten properties, all built or underway since 2021. Notable leases include Imperial Bag & Paper Co. and FedEx Ground. These leases highlight the demand in specific submarkets.

Major Leasing Activities

Amazon’s nearly 1 million SF lease was the largest. The lease was at Palmer Lakes Logistics Center, which Prologis owns. This indicates a significant focus on large distribution facilities. Such large leases are exceptional in the overall leasing activity.

Smaller Lease Dynamics

Most leases involve spaces under 50,000 SF. Significant activity occurs in submarkets near dense urban and airport areas. Miami Airport submarkets command higher rents above $20/SF. North Miami Beach and Hialeah offer more affordable industrial rents below $18/SF.

Record Rent Increases in Miami’s Industrial Market

Strong tenant demand has pushed Miami’s asking rents to around $19.70. Since 2019, rents have soared over 57%, surpassing the U.S. average increase. Logistics properties, primarily, have fueled this growth. More considerable logistics assets see lower rents but faster gains, narrowing the gap with smaller assets.

Diverse Rent Rates for Different Asset Sizes

Rent for 10,000 to 200,000 SF properties varies widely, from $6/SF to over $38/SF. The quality and age of buildings significantly influence these rates. A high-quality new warehouse commands three times the rent of an older one nearby. This showcases the premium tenants are willing to pay for more unique, better-located properties.

Trends in Larger Logistics Properties

Newer, larger logistics properties have asking rents over $15/SF. These are often fully occupied, reflecting strong demand. Rent varies with lease size, showing a premium for smaller, more flexible spaces. These dynamics underscore the robust demand for modern logistics facilities.

Moderating Rent Growth Amid Market Tightness

While slowing, Miami’s industrial rent growth remains among the highest in the U.S. Low vacancies will support continued rent increases. This tight market will continue to outperform the national average in rent gains. Miami’s industrial sector shows resilience, with growth projected to continue outpacing the U.S. average.

Construction Trends in Miami’s Industrial Sector

Over 8.6 million SF of construction is underway as of Q3 2023. Construction starts have dipped to 2.4 million SF in 2023, aligning with the five-year average. Delivery will peak in 2023, with anticipation of a slowdown in 2024. This activity will help maintain tight vacancy rates in the near term.

Geographic Focus of Construction Activity

Most new construction is located in north Miami and near key expressways. Over 70% of ongoing projects are in the Northeast of Outlying Miami-Dade, Medley, and North Miami Beach. These areas are within 30 minutes of major ports and the airport. Low rents and proximity to labor and transport make these submarkets highly desirable for tenants.

Significant Projects Underway

A significant portion of new buildings are larger than 100,000 SF. Palmer Lakes Logistics Center, pre-leased to Amazon, is among the largest projects. Bridge Point Commerce Center’s next phase adds over 700,000 SF per asset. These developments highlight the strong demand for modern industrial spaces in Miami.

Moderation in Sales Activity

Sales volume in the first half 2023 dropped to over $420 million. This marks the slowest start since the first half of 2020. The Duke Realty sale to Prologis influenced record volumes in 2022. Excluding this, Q4 2022 still saw significant activity, highlighting ongoing investor interest.

Impact of Major Transactions

A significant 2022 sale was the Medley Commerce Center for $241 million. This sale represented a substantial portion of Q4 2022’s activity. The largest 2023 sale to date involved a portfolio trade by Prologis with Blackstone. The Medley property in this portfolio fetched a premium price, illustrating strong market values.

Noteworthy 2023 Property Trades

The largest single property sale in 2023 was a cold storage facility for $43 million. Other significant sales include County Line Corporate Park properties and a truck terminal in Hialeah. These trades demonstrate continued investor confidence in Miami’s industrial sector.

Pricing Trends and Future Outlook

Annual pricing appreciation exceeds the U.S. average, with Miami properties seeing over 6% growth. However, economic slowdown and rising interest rates may dampen future transaction activity. Increased debt costs are causing investors to hold back, awaiting more stable conditions. Miami’s industrial market remains robust but faces a cautious outlook for 2023.

Closing Thoughts

In summary, Miami’s industrial market remains strong, with high investor interest and strategic growth. Despite a slowdown in 2023, demand for strategic locations keeps the market robust. Lumicre provides expert guidance for navigating these complexities. Contact Lumicre for your investment needs in this dynamic market.