Despite National Slowdown, This Industrial Market Surges Forward

Between slowing consumer spending and declining tenant demand, the industrial market across the United States is off from last year’s peak. However, one market still stands out as a growth driver.

Savannah, Georgia, is now the fourth-biggest port by cargo volume in the country, and despite facing challenges like other industrial markets, Savannah benefits from a unique set of factors that position it for sustained growth through the national industrial downshift.

"Savannah has had a slower response to the pent-up demand for Class A warehouse space,” Bartell Hardison and Michael Reid, Atlanta-based senior managing directors at Newmark, told LoopNet in an email. “Now, the market is experiencing a historic injection of much-needed modern supply for tenants to lease, and leasing volumes have demonstrated clear tenant appetite."

As Gulf and East Coast seaports steadily gain market share from West Coast ports thanks to infrastructure investment and shifts in global supply chains, Savannah is emerging as a major industrial hub that defies national trends.

At 4.2%, Savannah by far leads the pack when it comes to year-to-date net absorption of industrial properties as a percentage of occupied inventory, according to data from Newmark. That rate is more than double any other market in the country this year. Absorption remains strong despite a robust construction pipeline of more than 21 million square feet, according to CoStar, the publisher of LoopNet.

“Though consumer spending on goods has begun to level off, the Port of Savannah is one of the fastest-growing ports in the U.S.,” said Chuck McShane, a Charlotte-based director of market analytics at CoStar, in a June report.

Savannah is also among the top 10 markets in industrial rent growth, hitting an eye-popping 25% increase in the first quarter over the same period in 2022, according to Newmark. Experts still think there is runway for more rent growth in Savannah, given its attractive market rates ($7.81 per square foot in the first quarter of 2023) compared to the nearby ports of Jacksonville ($9.19) and Charleston ($9.61), not to mention New York ($18.37) or Los Angeles ($18.80).

“In addition, some large occupiers spanning multiple markets are consolidating into single or fewer facilities with an eye towards value — in which case, Savannah’s lower cost of real estate, labor and doing business will be a benefit,” The Newmark directors said.

The market share based on cargo volume for Gulf and East Coast seaports rose from 42% to 52% from 2007 to 2021, according to Newmark.

Savannah handled more than 5.7 million 20-foot equivalent units — an industry measure of cargo volume roughly analogous to a shipping container — in 2022, but active infrastructure investments point to more cargo capacity in Savannah’s future. A harbor deepening project expected to accommodate hundreds of thousands more containers was completed last year, and Savannah’s Jasper Ocean Terminal, which is currently under construction, is expected to be the largest in the country when it opens in 2035.

The market's manufacturing base is poised to grow after the announcement of Hyundai's $5.5 billion electric vehicle facility in Bryan County, Georgia, which will eventually employ 8,100 people across 17 million square feet. Savannah should continue to attract tenants that prioritize supply chain optimization and cost consciousness, McShane wrote.

While availabilities may currently be limited for smaller investors, there are still opportunities, especially for well-capitalized cash buyers. A historic pipeline of projects is set to deliver, creating more opportunities as supply modestly outpaces demand. Smaller industrial tenants can also benefit from Savannah's lower real estate and labor costs. Savannah’s average industrial sales price per square foot is $119 — well below the national average of $137 per square foot.

Pricing discovery is still ongoing, but Hardison and Reid project Savannah’s industrial capitalization rates to be close to 6%.

While Savannah's industrial market shows strong momentum, some factors warrant caution.

First, there's the supply surge. While Savannah’s robust construction pipeline addresses pent-up demand for distribution space, the market is also the most construction-intense in the country. The more than 20 million square feet of projects underway represents about 19% of Savannah’s total inventory, the highest rate in the United States. Most of these new projects are speculative but do tend to lease up quickly. The largest industrial construction project in Savannah, a 1.5-million-square-foot distribution center opening in July, is pre-leased to Lowe’s.

However, leasing activity is slowing as the market enters the second half of 2023. This is a development that coincides with increased new deliveries and suggests a temporary lull in tenant demand as consumer spending levels off.

Vacancy rates are likely to fluctuate thanks to this new supply. While the current vacancy rate in Savannah stands at 4.1%, well below its pre-pandemic average, market participants should carefully monitor any increases in vacancy caused by the upcoming short-term supply surge. Savannah’s strong rent growth may not be sustainable long term with so much new supply.

Industrial properties were the hottest asset class during the pandemic, but the national market is slowing down as we head into mid-2023. Adrian Ponsen, CoStar’s national director for industrial market analytics, wrote in a June report that the next six to 12 months could prove one of the more challenging periods for the sector over the next five years.

Oncoming new supply is “all but certain” to push up the national vacancy rate, which currently sits at 4.7%. The national industrial vacancy rate is still expected to remain below the 20-year average of 7.3%, but slow rent growth seems certain given that landlords will be contending with a record amount of newly-built space. Rent growth has already begun to decelerate from peak quarterly rent growth in mid-2022.

However, construction starts on new industrial projects have also been slowing since last fall, with developers increasingly concerned that higher interest rates are causing the values of newly delivered projects to dip below replacement costs. In short, Newmark said, market fundamentals are normalizing while debt costs have markedly increased.

This may well set the stage for vacancies to stabilize or begin tightening again by late 2024, and for rent growth to begin accelerating again, particularly if the global economy is emerging from its current slowdown.

Overall, Savannah's industrial market offers landlords favorable pricing power, supported by strong leasing activity and high tenant demand. While rent growth is expected to cool in the future, the city's rental rates remain attractive compared to neighboring port cities and offer competitive opportunities for businesses seeking industrial space in the region.

With attractive rental rates, opportunities for investors and tenants, and unique growth drivers, Savannah has firmly established itself as a thriving industrial hub, defying national trends and solidifying its position as a standout market in the industrial sector.