Investing in Tampa: Understanding the Industrial Market's Growth and Opportunities

Tampa Industrial Market Overview

1. Market Size and Location: Tampa’s industrial market is the second-largest in Florida, boasting 212 million square feet. It benefits from a strategic location along central Florida’s I-4 Corridor, making it an attractive hub for retailers, e-commerce, and logistics companies.
2. Access and Infrastructure: The market offers excellent access to major transportation channels, including Port Tampa Bay – Florida’s largest container port, two international airports, three primary arterial roadways (Interstates 4, 75, and 275), and the CSX terminal in Winter Haven.
3. Low Vacancy Rates: Tampa has maintained a sub-5% vacancy rate for nine consecutive quarters, at 4.1% as of the third quarter of 2023. This rate is significantly lower than the U.S. average.
4. Market Resilience: Despite broader economic challenges, Tampa’s industrial market has shown resilience with declining availabilities since the summer of 2022, with a current availability rate of 5.6%.
5. Construction and Preleasing: About 3.7 million square feet are under construction, 1.7% of the existing inventory. Tampa also leads in preleasing rates in Florida, at approximately 50%.
6. Rental Market Strength: Industrial rents in Tampa have surged by 12.4% over the past year to $11.90/SF, with forecasts suggesting continued growth through mid-2024.
7. Lease Escalations: Lease escalations have increased from the standard annual 3% to 4-5% for smaller spaces, reflecting the growing demand and value in the market.
8. Investment Volume Trends: After peaking in 2021-22, industrial investment volume in Tampa has slowed in 2023, with approximately $350 million in total sales volume.
9. Price Per Square Foot Increase: Tampa’s market is unique in its rising price per square foot, up 5% year-over-year, particularly in buildings under 50,000 SF.
10. Future Pricing Outlook: The market will likely continue its upward trajectory in pricing, indicating a robust and growing industrial sector in Tampa.

Strong Demand and Net Absorption

The Tampa industrial market stands out in Florida for its robust demand, having recorded a remarkable 5.0 million square feet of net absorption over the past year. This figure notably surpasses Miami, the largest industrial market in the state, which absorbed approximately 3.5 million square feet in the same timeframe. Despite these high absorption rates, they are still outpaced by new deliveries, with 5.8 million square feet completing construction over the past year. The eastern portion of Hillsborough County has been particularly active, attracting a significant portion of extensive tenant activities due to the availability of speculative and build-to-suit new construction.

Leasing Activity and Absorption Trends

The Tampa industrial market has recently seen a slowdown in new, more significant industrial leasing activities, particularly for spaces over 100,000 square feet. In the first half of 2023, seventeen tenants committed to a total of 1.3 million square feet in new deals, a decrease compared to the 1.5 million square feet leased by six tenants in the fourth quarter of 2022 alone. Factors such as limited vacancy, a decreasing construction pipeline, and general hesitancy to finalize leases due to economic uncertainties contribute to this deceleration in industrial leasing.

Vacancy Rates and Core Submarket Dynamics

Tampa’s industrial vacancy rate has consistently remained below 5% since the fourth quarter of 2021, currently standing at 4.1% as of the third quarter of 2023. The market has fewer than 20 availabilities over 100,000 square feet, with very few located in the core submarkets of Tampa, namely the East Side, Westshore/Airport, and Pinellas County. Interestingly, a significant portion of the market’s largest vacancies exist outside the core, specifically in E Hillsborough/Plant City, bordering the Lakeland industrial market known for its larger blocks of space.

Industrial Pipeline and Preleasing Rates

The industrial pipeline in Tampa has been diminishing over recent quarters, with approximately 3.7 million square feet currently under construction. However, Tampa boasts the highest preleasing rate in Florida at roughly 50%, leaving less than 2 million square feet of the pipeline available for lease. The pipeline will likely remain below the historic levels of 2021 and 2022 as developable land becomes scarcer in the Tampa market.

Market Outlook and Tenant Trepidation

Market participants have observed that larger requirements are taking longer to finalize compared to 18 to 24 months ago as tenants grapple with concerns about the broader economic climate. While this might indicate a short-term slowdown in momentum, the long-term outlook for Tampa’s industrial market remains positive, suggesting sustained growth and development in the future.

Surge in Industrial Asking Rents

Over the past five years, Tampa’s industrial asking rents have soared by 67.7%. They reached a record $11.90 per square foot in Q3 2023. This rise is due to increased demand and new construction. With low vacancies, landlords are confidently raising rates.

Slowing Rent Growth Offers Tenant Relief

Asking rent gains in Tampa peaked at 17% in mid-2022 but are now slowing. The current rate stands at 12.4%. This deceleration could ease the burden on tenants, especially in smaller spaces. Starting rents for spaces under 15,000 square feet have significantly increased over three years.

New Constructions Driving Rent Increases

Rent growth is most notable in new constructions and recent deliveries. Since January 2020, rents in these buildings have jumped over 15%. New projects need asking rates above $10/SF NNN to offset rising construction costs. Deals at 301 Business Center in 2023 exemplify this trend.

Notable Lease Deals in New Developments

In 2023, iShared Transportation signed a $10.95/SF lease in the East Side submarket. This was for a space in the newly delivered 301 Business Center. Express Parts also leased 41,000 square feet there, with rents starting at $10.40/SF. These deals highlight the upward trend in new construction rents.

Slowing Industrial Construction in Tampa

In the past year, new industrial construction in Tampa has slowed. The active pipeline is just 3.7 million square feet as of Q3 2023. This increase will boost inventory by only 1.7%, below the national average. Preleasing is strong, with about 50% already accounted for. CoStar predicts vacancy will stay under 5% for the foreseeable future.

Concentration of Industrial Development in Hillsborough County

Historically, concentrated industrial development has occurred along I-4 on Hillsborough County’s eastern side. In the past year, developers delivered about 5.8 million square feet. Major build-to-suits in the E Hillsborough/Plant City submarket contributed significantly to this development. Lowe’s and City Furniture’s large distribution facilities boosted absorption in recent quarters.

Pasco County: Tampa’s Emerging Industrial Hub

Pasco County is becoming Tampa’s new industrial hotspot. It hosts four of the five largest active developments in the region. Harrod Properties’ North Pasco Corporate Center is the largest ongoing project. It has secured significant preleasing, including a 500,000-square-foot build-to-suit for Hit Promotional Products.

Major Developments and Preleasing in Pasco County

The North Pasco Corporate Center, spanning 940,000 square feet, is a key development. It has attracted significant tenants like Hit Promotional Products and Gary Plastic Packaging Corporation. These preleases highlight Pasco County’s growing importance in Tampa’s industrial landscape.

Decline in Industrial Investment Activity

Through the first half of 2023, industrial investment in Tampa hit a three-year low. The peak was in 2021, with nearly $1.8 billion in sales. Since then, investment volume has steadily decreased, totaling just over $450 million in 2023.

Institutional Investors Dominate the Market

Institutional investors dominate Tampa’s market despite economic uncertainties, especially in sales over $5 million. They account for about 50% of buyers this year. However, large transactions have slowed, with only one sale over $50 million in the first half of 2023. Most trades have been under $5 million, comprising nearly 60% of 2023’s sales volume.

Private Buyers and New Construction Sales

Private buyers, including high net-worth individuals and family offices, represent over 80% of the buyer pool. New constructions built since January 2020 are fetching the lowest cap rates, around 5%. This outperforms the overall market cap rate of 7.2%. A notable example is Stonepeak Partners’ purchase of a 2022-built Amazon Distribution Center at a 4.8% cap rate.

Challenges Ahead for Tampa’s Industrial Market

While Tampa’s industrial fundamentals have been solid, future challenges loom. The market is grappling with interest rate volatility and broader economic headwinds. These factors have been affecting U.S. capital markets since early 2022.

Closing Thoughts

Tampa’s industrial market is dynamic, marked by strong demand and strategic growth. Despite recent investment slowdowns, its fundamentals remain robust. Challenges like interest rate volatility are present, yet the market’s resilience is evident. For expert guidance in this complex market, consider Lumicre for your investment needs.