Factors Powering the Sunbelt’s Industrial Expansion

The light industrial sector in the Sunbelt market has experienced significant growth over recent years, fueled by a combination of population increases and economic shifts. This sector, comprising small-scale manufacturing, warehousing, and service-oriented businesses, plays a crucial role in supporting local and regional economies. As more people and businesses move to the Sunbelt region, the demand for light industrial spaces continues to surge, creating unique opportunities and challenges for investors. In this article, Lucern Capital Partner’s Managing Partner and Chief Investment Officer, Frank Forte, sheds light on key factors driving the expansion of the light industrial sector in the Sunbelt, explores the dynamics of supply and demand, and discusses how firms navigate this evolving landscape to capitalize on emerging trends.

What factors have contributed to the growth of the light industrial sector in the Sunbelt market?

Several factors have contributed to the growth of the light industrial sector in the Sunbelt market. One of the main drivers is population growth, as light industrial spaces tend to be developed where population increases occur. This sector comprises service-oriented companies that cater to local and regional populations, such as painting companies, mechanics, tile distribution companies, local gyms, hair salons, graphics companies, manufacturing companies, and automotive services. The surge in population in the Southeast, particularly post-COVID, has supported rent growth and increased demand for these spaces.

Another factor contributing to the growth of this sector in the Sunbelt is the scarcity of available light industrial spaces in mature and densely populated markets. In densely populated areas, light industrial spaces have been replaced by apartments, larger logistics warehouses, or housing developments. The reduction in available space creates scarcity, making existing spaces more valuable. Additionally, the current economic landscape, including factors like job creation, impacts the development of light industrial properties. Development is challenging due to high building costs and the need for high rents to justify these costs. While large-scale logistics facilities are more feasible to develop due to economies of scale, smaller, more specialized light industrial spaces remain scarce. As a result, developers are less inclined to build unless they have a competitive advantage, such as owning the land or having lower construction costs.

How do demand-supply dynamics in the Sunbelt market differ from other regions?

In the Sunbelt market, demand for light industrial properties is driven by population growth and pro-business development policies. Land is more plentiful in the region compared to densely populated areas like the Northeast, where zoning restrictions and scarcity of land create significant barriers to entry. In the Northeast, properties are valuable because new developments are nearly impossible, while in the Southeast, the influx of population and supportive business environment drive demand and development.

What specific characteristics does Lucern Capital Partners look for when evaluating light industrial investment opportunities in the Sunbelt market?

Our team generally looks for several key characteristics when evaluating investment opportunities. First, we look at whether the property has stable, positive cash flow or the potential to achieve it quickly. Second, we ensure that we won’t be overpaying for the asset relative to replacement costs and how similar properties are priced in the market. Third, it is important that every industrial asset we consider investing in has universal appeal and flexibility to accommodate various tenants and uses. Finally, we prefer to invest in properties that have staggered lease expirations so that we avoid large vacancies at any given time.

How have tenant preferences shifted in the Sunbelt light industrial market, and how has your firm adapted?

Recent industry trends in the Sunbelt market show a preference for lower percentages of office space within light industrial properties. This shift is due to several factors, including efficiency gains in technology, which have reduced the need for office staff. Additionally, the cost of maintaining physical office space has risen dramatically due to property owners’ increasing costs. This has resulted in companies either downsizing or adopting a work-from-home policy.

We have also seen a shift in how tenants use space today, with greater demand for warehouse space for inventory and operations, reflecting the economy’s shift towards quicker delivery of goods and services. To remain competitive, property owners and operators must adapt by optimizing space usage for storage and warehousing, making it even more important to invest in flexible light industrial assets.

How does Lucern Capital Partners assess and mitigate the risks associated with investing in Sunbelt light industrial properties?

The main two risks we pay close attention to are downtime and vacancy. To mitigate these risks, we seek to acquire versatile spaces that appeal to various tenants. For example, light industrial assets, with some units having truck bays and other spaces offering professional services, can attract a wide variety of tenants. In addition, maintaining close relationships with tenants and promptly addressing their needs is essential to ensuring high occupancy rates and tenant satisfaction. We actively invest in each asset we acquire, which means we maintain frequent property visits, have regular calls with the property management company, and maintain close relationships with tenants. Lastly, to mitigate the risks I mentioned earlier, we pay close attention to when leases expire to prevent large vacancies at any given time.

What challenges and opportunities might investors encounter in the Sunbelt light industrial real estate market?

There are a number of challenges and opportunities investors may encounter when investing in light industrial properties located in the Sunbelt. Let’s start with the challenges. First, there is high competition for deals which makes understanding local market dynamics paramount. Second, because of the high demand for light industrial spaces, there is a risk of rents becoming unaffordable for smaller businesses. Firms need to balance rent increases with maintaining tenant affordability and ensuring spaces remain attractive and functional for a wide range of uses.

As for opportunities, there are several. The first we have already discussed, but it is worthwhile mentioning again. The region’s strong population growth has created demand for light industrial spaces. Businesses need to be able to get goods and services to their customers in a timely fashion, driving demand for this asset class. Second is the supportive business environment in the Sunbelt region. A business-friendly environment attracts investors, business owners and large corporations, driving demand for this asset class.

About Lucern Capital Partners

Founded in 2016, Lucern Capital Partners is a real estate investment firm that makes opportunistic investments in industrial, multi-family, and mixed-use assets in the Sunbelt, with a focus on the Carolinas. Lucern applies a value-oriented philosophy to investing, which delivers superior, risk-adjusted returns. Lucern garners unequaled results because their management team enjoys distinct competitive advantages: maintaining an institutional approach, a yield-focused strategy, deep market knowledge, and active asset management.