Supply chain modernization and the growth of e-commerce have driven a sustained warehouse development boom, and primary distribution markets have accumulated the bulk of new supply. Yet, these secular shifts have also produced a growing need for a broader regional distribution network.
One year ago, CBRE Research analyzed warehouse fundamentals in aggregated primary and secondary markets and found opportunity for continued development in both tiers: Cumulative demand outpaced supply in primary markets by 205 million sq. ft., and in secondary markets by 185 million sq. ft. At the time, CBRE Research predicted that secondary markets were poised for accelerated growth due to a slower development response to pent-up demand in this cycle. Indeed, one year later, the cumulative supply/demand imbalance narrowed in primary markets and grew in secondary markets. In Q1 2018, demand outpaced supply by 177 million sq. ft. in primary markets, and by 194 million sq. ft. in secondary markets. Complementing this trend, overall vacancy year-over-year ticked up 10 basis points (bps) in the primary markets and dropped 40 bps in secondary markets.
Source: CBRE Econometric Advisors, CBRE Research 2018.
Why are Secondary Markets Outperforming?
One of the major macro trends in the immediate aftermath of the Global Financial Crisis was the population migration to urban cores, particularly in major primary markets. Not surprisingly, omnichannel retailers focused their initial rollout efforts in these large and growing markets. However, this population trend has begun to reverse, with growth rates in small secondary metropolitan areas rising and growth in the large primary markets falling.
As preferences evolve and many consumers now expect a high level of service through an omnichannel format, retailers have expanded their focus beyond primary markets and into growing secondary markets. This is seen in the growing demand for logistics space in secondary markets and should continue as their populations grow and consumers become more accustomed to omnichannel shopping.
Source: U.S. Census Bureau, 2017.
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