Industrial Market Analysis: Measuring Where to Invest

Summer 2022 Issue
By: Trey Barrineau
Investors who want to enter the booming North American industrial segment must do a significant amount of research about their chosen market before committing to a project. This involves studying demographics, economics, geography and more. Getty Images

How data delivers insights that guide investment decisions.

Data-driven approaches are frequently used to identify core growth markets for industrial development and acquisitions. These combine top-down demographic and macroeconomic data with bottom-up information from specific submarkets. A recent webinar for NAIOP members provided insights into how commercial real estate professionals can turn data into actionable information for investors.

According to James Freeman, managing director at Bridge Investment Group, market analysis aims to ground assumptions made in investment management on real-world dynamics, which Bridge believes leads to a higher probability of success.

“For the industrial segment, that revolves around understanding local dynamics in terms of the drivers and constraints around each submarket, but also understanding what the overall global supply chain looks like, both from a consumption and production standpoint,” he said. “Understanding both of those is critically important.”

Jack Robinson, Ph.D., managing director and head of research at Bridge Investment Group, said there are multiple use cases for industrial properties that cover many different product types and strategies.

“The first step is determining the right altitude for your analysis,” he said. “Are you taking the 30,000-foot view or are you drilling down to submarkets?”

Next, Robinson said it’s important to create an objective framework that reduces bias.

“You want to model it after the drivers that you think are going to be informing your investment decisions, but you want it to be a check against previous experience or things you’ve seen in the market,” he said.

This may require different approaches for different strategies, or an emphasis on some elements over others.

“In particular, there’s always that tension between the characteristics of these markets you have these opportunities in,” Robinson said. “They could be those high-barrier-to-entry markets, or they could be those infrastructure markets that are critical to the supply chain.”

What Goes Into Market Analysis?

At a macro level, the major factors in market analysis include population, employment and consumer behavior.

For population, Robinson said signs of growth are critical, both in the past and in forecasts for the future.

Sources to track population changes range from publicly available resources, such as the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, to private-sector organizations such as Moody’s Analytics, Oxford Economics or Capital Economics, said Robinson. Decisions about selecting data providers are informed by the granularity of the analysis as well as the desired frequency of updates. 

Another crucial measure is the relative economic health of a metro area that is under consideration for investment. One way analysts do this is by comparing the gross domestic product (GDP) of the United States to the gross metropolitan product (GMP) of a market that an industrial investor is looking to enter. Questions to consider include: Is the region more or less productive than the U.S. trend? How does it compare to similar markets? How does it compare to the nation as a whole?

Employment growth is another key data point. Employment should be growing in potential industrial investment markets, not only overall, but also by key industries. Location quotients, which measure how “saturated” an industry is in a local area compared to the U.S. as a whole, can also play a vital role in this assessment.

Another area to examine is the labor pool. For example, with new development, a question to consider is “are there enough workers to support the proposed facility?” Sources of data on employment include the U.S. Bureau of Labor Statistics, ADP payroll statistics and Internal Revenue Service records.

Next, consumer behavior is an integral factor to examine. Questions to consider include: What are consumers buying? Where are they buying it? How are they buying it? Are they favoring bricks and mortar or e-commerce? Sources for information on consumer behavior include the U.S. Bureau of Labor Statistics’ Consumer Spending Patterns or private-sector firms such as Esri Demographics, as well as companies that track credit card transactions.

Digging Deeper

Freeman then discussed submarkets and sector-specific operating inputs.

“What we’re talking about is submarket-level information and feet-on-the-street resources,” he said.

Demand is typically boiled down to its lowest common denominator, which is consumption, Freeman said. The objective then is to identify those metrics and inputs that have a high correlation to demand. These include factors such as rent growth, aggregate demand growth, and the ratio of net absorption to delivery.

“On the supply side, we look at total inventory and market scale,” Freeman said. “We like to look at a submarket’s historical trends related to new deliveries, its pipeline of facilities under construction, as well as vacancy trends.”

As for capital markets, Freeman said it’s important to understand cap rate movements in a particular submarket. Also critical is understanding returns — including total returns, historical compound annual growth rate (CAGR), and internal rate of return (IRR) partitioning using established industry benchmarks such as the National Council of Real Estate Investment Fiduciaries (NCREIF).

“We also look at liquidity,” Freeman said. “What are the annual and cumulative transaction volumes in submarkets?”

Freeman added that Bridge focuses on absolute growth as well as compound annual growth in markets where it’s interested in investing.

“Seeing 1% growth in a large population area can be more compelling than 2%-3% growth in a smaller area,” he said. “We want to see two to three cycles. We want to get as much available data as possible. It’s about mitigating the risk on the downside rather than trying to squeeze every last basis point of return on an investment.”

Market Tier Rankings

Finally, Freeman noted that it’s crucial to avoid a one-size-fits-all mentality when it comes to locating favorable markets for industrial investment. Commercial real estate firms, industry groups and academics have developed a number of methods for ranking and categorizing markets. (For more, see the NAIOP Research Foundation’s recent reports, “A Two-Dimensional Approach to Evaluating Commercial Real Estate Markets” and “A New Look at Market Tier and Ranking Systems.”)

At Bridge, they’ve broken down every U.S. logistics market into three broad-based buckets. The largest are the Global Gateway Markets, which represent approximately 40% of U.S. inventory and 30% of the U.S. population. Examples include Los Angeles and Atlanta. Next are the Regional Prime Growth Markets, which are up-and-coming areas with diversified economies. Boston is an example of this type of market. Finally, there are the Logistics Infrastructure Markets. These areas are crucial links in the supply chain because they have strong intermodal connections. Many are located in the Midwest; Indianapolis is a prime example. 

“This analysis creates an actionable framework to drive your investment strategy,” Freeman said.

Trey Barrineau is the managing editor of publications for NAIOP.