Miami industrial market jumps onto investors’ radar as top performer

A closer look at recent momentum in the Miami industrial sector

Investment managers who are drilling down to identify pockets of opportunity in a more challenging commercial real estate market are finding it in Miami’s industrial real estate.

US industrial as a whole has remained a favored sector due to its underlying demand drivers and solid fundamentals, and Miami has jumped to the top as a leader in both third-quarter and year-to-date performance. According to an Altus Group analysis of NCREIF ODCE Index returns, Miami industrial assets posted a total year-to-date return of 6.7% through the third quarter. Those results are head and shoulders above the national average total return of -5.1% for the same period.

Additionally, Miami was the only metro to post a positive number of the 16 major metros that Altus Group studied. The near-term performance numbers paint a pretty compelling picture. Looking at the market from a wider lens, its 4-year performance is a respectable 17.4%. Those returns put Miami in a solid fourth position behind the dominant West Coast markets – the Inland Empire, Los Angeles, and San Diego – all of which generated 4-year returns above 20%.

While its recent performance is garnering more attention from investment managers, a key question is whether Miami can hold onto that momentum and deliver solid results over the long term. In this article, we take a closer look at the underlying demand drivers fueling returns, and headwinds and tailwinds that could influence the future outlook and investment thesis for Miami’s industrial sector.

Drivers for demand

The recent alpha performance is backed by simple supply and demand fundamentals. Industry data shows that Miami is one of the tightest markets in the country with vacancies below 2%. That lack of available space is in turn driving rent growth and offsetting some of the downward pressure on property values caused by higher interest rates. That demand stems from both population and economic growth in Miami, and the state of Florida, with more distribution space needed to serve the growing market.

Altus Group data reveals that the Florida population grew at roughly twice the rate of the US population from 2020 to 2023. Florida also captured more state-to-state movement than any other state over the past two years, slightly edging out Texas. The population data does not include the rise in seasonal residents who are choosing to live in Florida at least part of the time, which also has increased in the wake of the pandemic. The pre-pandemic versus post-pandemic GDP growth in Florida was approximately 2x the US GDP growth rate.

Miami also has benefitted from supply chain reconfiguration and more cargo moving through the Panama Canal. The cargo ship backlogs outside of the LA and Long Beach ports that made headlines in 2021 due to a cascade of issues resulted in cargo being diverted through the Panama Canal. West Coast ports were so backed up that it was actually faster for many to bring goods into the US through the Panama Canal to the Southern and East Coast ports.

An analysis of shipping volume from Descartes comparing the first quarter of 2023 to 2019, shows a 10.1% drop in volume of cargo moving through the West Coast ports. The Gulf Coast ports saw a bigger increase in volume at 43.4%, while the East Coast ports also gained 6.4%. Congestion at the larger ports funneled more traffic to smaller ports, such as Miami. According to the US Department of Transportation, PortMiami ranks #13 by TEU based on 2022 data.

Figure 1: List of top 25 container ports by TEU

Paving the way for growth

Traditionally, PortMiami has been better known as a cruise ship port than a cargo ship port. However, the port is able to handle larger ships and greater capacity thanks to $1 billion in improvements that have included dredging and deepening of channels and larger cranes to assist in offloading cargo.

PortMiami has a new master plan 2035 that charts an ambitious course for future growth. Due in part to its roster of planned capital improvement projects, it is anticipated that cargo traffic will double over the next decade. Its list of completed improvements that have made it “Big Ship Ready” include:

• The main cargo channel has been deepened to accommodate super-sized vessels

• Its new Super Post-Panamax Cranes are the largest in any Southeastern US port

• The port has direct access to the US interstate highway system through a fast access tunnel

• PortMiami has invested $50 million in the modernization of its on-dock freight rail system, creating a connection to the national rail system and expediting the movement of goods throughout Florida and the continental US

Increased port traffic has spurred demand for industrial warehouses served by PortMiami. Altus Group data shows that the annual average growth rate on market rents for industrial warehouses in Miami, which had been hovering around or less than 1% since before the pandemic, rocketed up to 5% annual market rent growth beginning with 2021 Q4. The market has sustained that growth pace through 2022 and 2023, with some quarters hitting 8% growth.

Long-term outlook

Miami has both headwinds and tailwinds ahead that could impact investment performance. Ports that benefited from the rerouting of container shipping due to pandemic-related congestion could see some “normalizing” of traffic patterns. LA and Long Beach also have resolved some of their labor issues that also pushed traffic to Panama Canal-connected alternatives. LA and Long Beach remain the top two ports in the country based on TEU.

Another headwind facing Miami is drought conditions impacting the Panama Canal, which may lessen cargo volume and contribute to the rebound of West Coast ports. As a result, the increased demand for warehouse space may moderate and rent growth may return to normal in the coming quarters. However, even after labor issues and backlogs were resolved in the Western ports, some companies have elected to move goods through the Panama Canal to the East Coast and Gulf ports to offload their cargo.

Another potential challenge facing Miami is the record-high level of construction activity currently underway to satisfy increased demand. The volume of space currently under construction varies depending on the source, with estimates ranging between 6.7 and 8 million sf. Those deliveries could result in some softening of fundamentals in the near term as that space is absorbed. Over the longer term, investors may benefit from the market’s barriers to entry with limited industrial land available for development.