Industrial Sector Ends Q1 with Strong Fundamentals Amid Continued Economic Woes 

Key Takeaways: 

• National industrial in-place rents averaged $7.15 per square foot in March, up 7.1% year-over-year    
• The national vacancy rate stood at 3.9%, unchanged month-over-month 
• 636.6 million square feet of industrial space was under construction nationwide 
• Industrial transactions totaled $7.7 billion in Q1 2023, trading at an average sale price of $133.77 per square foot 
• The Bay Area and the Inland Empire recorded more than $1B in sales each in Q1 
• St. Louis was the only metro to register negative rent growth, falling 2.0% year-over-year 
• Miami was the most expensive market in the South, with in-place rents at $9.61 per square foot 
• Philadelphia led the Northeast in development with 18 million square feet of space underway 

The current narrative around commercial real estate continues to revolve around uncertainties, but the industrial sector continues its strong performance, the latest U.S. industrial market report reveals. Average industrial rents have increased every month over the last year and stood at an all-time high of $7.15 per square foot as of March. 

Additionally, industrial vacancy rates remained extremely low across the country, averaging 3.9% nationally, with only seven of the top 30 industrial metros coming in at 5.0% or more. Nonetheless, demand for space could cool to more moderate levels as large users reconfigure distribution chains in an attempt to deal with rising costs. For now, however, demand remains firmly positive, according to industrial market outlooks. And while transactional activity has slowed similarly to other property sectors, the price per square foot for industrial sales reached record levels in the first quarter of 2023. 

Be careful to not group all commercial real estate asset classes together under the same doom and gloom umbrella. The fundamentals in industrial remain positive, even as it comes off the historic run we have enjoyed over the last three years.

Peter Kolaczynski, CommercialEdge Senior Manager 

Arguably the biggest headwind facing the industry at the moment is the increase in interest rates. Specifically, the challenge stands in the impact on pricing and the ability to refinance loans originated when mortgage rates were lower. Given the rise in mortgage rates and the tightening of underwriting standards enacted by banks in recent quarters, many properties refinanced today could net 20% to 25% lower profits than they did at origination.  

However, unlike the office sector where vacancy rates are rising and rents are softening to the growing work-from-home trend, industrial fundamentals are solid. For example, Columbus and Atlanta have a relatively high percentage of maturing loans by total stock, but the vacancy rate in those markets is less than 3%. Many industrial loans coming up for refinance will have the benefit of increased revenue during loan seasoning. Plus, industrial assets remain in demand among most lenders and investors. 

Rents and Occupancy: Industrial Rent Growth Still Rising

National in-place rents for industrial space averaged $7.15 per square foot in March, up 7.1% year-over-year, the latest U.S. industrial market report shows. During the first quarter of 2023, national average rents increased by 14 cents, or 2.0%. 

Large coastal markets continued to lead the way in industrial rent growth. Specifically, metros with the highest year-over-year increases in asking rents through March were the Inland Empire (16.3% year-over-year), Los Angeles (13.1%), Boston (9.7%), Orange County (7.6%), New Jersey (8.6%) and Bridgeport (8.3%). 18 of the top 30 metros recorded year-over-year growth rates of 5.2% or more, while St. Louis, was the only metro to post negative growth, declining 2% year-over-year. 

Average Rent by Metro 

The national industrial vacancy rate in March was unchanged from the previous month, resting at 3.9%. Industrial occupancy also remained solid, despite leasing pullbacks in some markets, paired with the wave of supply that has come online in recent years and remains ongoing. 

The lowest industrial vacancy rates in the country were recorded mostly in the Midwest and West, with Columbus (1.2%), the Inland Empire (1.7%), Phoenix (2.0%), Los Angeles (2.3%) and Indianapolis (2.5%) posting some of the tightest rates. At the same time, the Northeastern consumer hubs of New Jersey and Bridgeport (2.6%) also sported low vacancy rates. 

The average rate of new leases signed in the past 12 months rose to $9.24 per square foot at the end of March, gaining 15 cents month-over-month. That also resulted in a lease spread of $2.09 per square foot. Los Angeles ($7.51), the Inland Empire ($7.46) and Orange County ($4.88) were the metros with the largest lease spreads at the end of Q1 2023. 

Supply: Deliveries Remain High, but the Pipeline Is Waning 

Nationally, 636.6 million square feet of new industrial space was under construction as of March, down from February’s 667.5 million square feet and early 2023’s 742.3 million square feet. The waning pipeline is likely a sign of things to come, industrial property outlooks predict. 

Overall, about 127 million square feet of industrial space was delivered in the first quarter of the year. If that pace continues, it will shatter last year’s record 489 million square feet of deliveries. However, industrial market outlooks predict that completions will decelerate during the rest of the year. 

Industrial Space Under Construction (Million Sq. Ft) 

While the boom in industrial demand is by no means over, the record pace of development of the last few years is almost certain to trend towards more moderate levels. For one thing, companies such as Amazon are reducing space estimates and cutting back on new projects. Some retailers are also using store space as a way of reducing demand for new logistics facilities. And while supply chain issues have diminished, projects are still taking longer to complete. 

Another reason for the decelerating pipeline is that commercial banks are tightening lending standards for construction loans and financing is less available now than it was in recent years. 

Transactions: Sales Activity Drops as Pricing Hits New High

Transactional activity slowed considerably in Q1 2023 as investors and buyers remained far apart on pricing and debt financing became increasingly difficult to find, according to real estate market reports. Overall, a total of $7.7 billion in sales were completed in the first quarter. While that number is likely to increase due to the lag in collecting data, it remains well below the $20.5 billion completed in the same quarter last year. In fact, the sales volume of Q1 2023 was the lowest first quarter volume since 2016, when only $5.9 billion in transactions were closed. 

2023 Year-to-Date Sales (Millions) 

Commercial property sales are increasingly constrained by the rising cost of mortgage debt and the growing pessimism regarding rent growth stemming from expectations of an economic slowdown. That also impacts the industrial sector, even though it has performed well compared to other property types such as office and retail. 

But even as sales slowed in the first quarter of the year, the average price continued to increase. The average sale price per square foot in Q1 2023 was $133.77, topping the $128.58 average of 2022 to become the highest quarterly price per square foot ever recorded. 

Western Markets: The Bay Area and the Inland Empire Close Q1 with Over $1B in Sales Each 

Southern California’s industrial rent growth remains firmly in the lead, with rents growing 16.3% in the Inland Empire — more than double the national increase of 7.1% — and 13.1% in Los Angeles. In fact, the two Western markets were the only ones to record double-digit rent growth among the 30 largest industrial markets in the U.S. Orange County and Phoenix also recorded year-over-year rent gains above the national average, rising 7.6% and 7.5%, respectively.  

Thanks to the continued rent growth of recent months, as reported in previous CommercialEdge industrial real estate market reports, Western markets also remained the most expensive in the country. Specifically, the nation’s top four in-place rents were recorded in the region, with Orange County’s $12.74 per square foot rate in the lead, followed by the Bay Area’s $11.93 per square foot, Los Angeles’ $11.80 per square foot and Seattle’s $9.64 per square foot rates.  

West Regional Highlights 

Additionally, Southern California markets also continued to see significant lease spreads. In Los Angeles, new leases were signed at $20.06 per square foot over the past 12 months, $7.51 above in-place rents. The Inland Empire and Orange County also stood out nationally, registering lease spreads of $7.44 per square foot and $4.88 per square foot, respectively. 

Unsurprisingly, major industrial markets in the West had some of the lowest vacancy rates in the U.S., with the Inland Empire at 1.7%, remaining flat month-over-month and keeping its position as the second-lowest rate among the top 30 U.S. industrial markets. Phoenix and Los Angeles followed with vacancy rates of 2.0% and 2.3%, respectively. 

Sale Price Per Square Foot  

In line with trends reported in previous CommercialEdge industrial real estate market reports, Phoenix remained the number one Western market for development, with 54.5 million square feet of projects under construction, accounting for 15.7% of existing stock. In terms of square footage, Phoenix was only outpaced by Dallas – Fort Worth’s 59.7-million-square-foot pipeline. On a percentage-of-stock basis, Denver had the second largest pipeline in the region with 12.7 million square feet underway, equal to 5.1% of total stock. 

Looking at transactions, the Bay Area led the U.S. in the first quarter of 2023, closing $1.05 billion in sales at $489.76 per square foot. The Inland Empire had the second-largest sales volume nationwide, with transactions amounting to $1.02 billion over the first three months of the year and assets trading at $251.73 per square foot. In terms of sale prices, however, Los Angeles took the lead nationally, with an average price of $509 per square foot. 

Midwestern Markets: St. Louis Records Negative Rent Growth, Falls 2.0% Y-o-Y 

Established logistics hubs in the Midwest continued to have some of the highest occupancy rates across leading industrial markets in the U.S. For example, with only 1.2% of space available for lease, Columbus remained the tightest industrial market nationwide. Furthermore, Indianapolis had the second lowest vacancy rate in the region at 2.4%, followed by St. Louis’ 2.9% rate. On the other end of the spectrum stood the St. Paul – Minneapolis market with a vacancy rate of 5.9%. 

Despite low vacancies, Midwestern markets posted the slowest rent growth nationwide, with in-place rents in St. Louis falling 2.0% year-over-year in March — making St. Louis the only leading industrial market with a negative rent growth. At the same time, Columbus and Indianapolis recorded upticks of 3.2% and 3.8%, respectively, while Detroit led rent growth in the Midwest with an increase of 5.9% over year-ago figures. As a result, Motor City was also one of the priciest markets in the region, with in-place rents at $6.11 per square foot. That figure was outpaced only by the $6.25 per square foot rate recorded in the Twin Cities.  

Midwest Regional Highlights 

The region’s sluggish growth has been credited to heavier inventory growth in recent years, driven by more available land for new industrial projects. On a percentage-of-stock basis, Indianapolis and Columbus had the largest development pipelines in the Midwest, equal to 4.1% and 4.0% of their existing stocks, respectively. In terms of square footage, Chicago led with 26.3 million square feet underway, accounting for 2.6% of its total inventory.  

When it came to sales volumes, Cincinnati took the lead in the Midwest with $288 million in industrial sales from January through March, at a rate of $180.30 per square foot. Chicago had the second-largest sales volume in the region, with transactions amounting to $154 million in the first three months of the year. In terms of pricing, Indianapolis and its $152.57 per square foot rate was second only to Cincinnati in the Midwest. 

Southern Markets: Miami Records Most Robust Industrial Fundamentals in the South 

Among top Southern U.S. industrial markets, Miami posted some of the strongest fundamentals at the end of March, leading the region with a year-over-year rent growth of 7.6%. Miami also recorded the South’s lowest vacancy rate at 2.9%, tying with Atlanta. Moreover, Miami was also the most expensive market in the South, with in-place rents at $9.61 per square foot, while contracts signed over the past 12 months averaged $13.36 per square foot. 

However, the South also registered the highest vacancy rate nationwide as available industrial space in Houston reached 7.9% of existing stock. Overall, Southern metros remained more affordable than port markets in the West or Northeast, with in-place rents coming in below the national average of $7.15 per square foot in every market except Miami. 

South Regional Highlights 

Specifically, Memphis posted the lowest lease rate of the country’s leading industrial markets at $3.59 per square foot, followed by Atlanta’s $4.99 per square foot and Dallas – Fort Worth’s $5.27 per square foot. Yet, Atlanta and the Dallas – Fort Worth market recorded the highest year-over-year rent growth in the South except for Miami, rising 7.3% and 6.1%, respectively, in March. 

Dallas – Fort Worth continued to have the largest construction pipeline in terms of square footage across the nation. At the end of March, the Metroplex had a new supply pipeline of 59.7 million square feet, which is set to increase the market’s industrial footprint by 6.8%. Considering planned projects as well, the market’s inventory could grow by as much as 12.2%. 

Despite having the highest industrial vacancy rate among the country’s leading markets, Houston also had the second-largest development pipeline in the South with 20.8 million square feet of industrial space under construction, accounting for 3.6% of the market’s total stock. What is more, the market could expand its inventory by as much as 6.5% if all planned projects materialize. North Carolina’s Charlotte also had a significant new supply pipeline at the end of March, with 13.3 million square feet of industrial space under construction, equal to 4.4% of existing stock. 

Industrial Space Under Construction & Planned (% of stock) 

In terms of sale prices, Houston was the most expensive in the region, with a year-to-date rate of $153.33 per square foot at the end of March. Atlanta followed, with $115.59 per square foot, while the Dallas – Fort Worth market ranked third with an average of $112.23 per square foot. On the other end of the spectrum, Memphis industrial assets traded at $75.30 per square foot, the lowest price in the region. 

Houston also ranked first in the South in terms of sales volumes, recording $233 million in industrial deals in the first quarter of 2023. Charlotte had the second-largest sales volume totaling $209 million in the first three months of the year. Conversely, Baltimore had the smallest sales volume, recording a modest $43 million over the same period. 

Northeastern Markets: Philadelphia Leads Northeast in Industrial Development, Despite Weaker Fundamentals 

While Southern California still dominates asking rent rates as well as rent growth in the U.S. industrial market, Northeastern consumer hubs like New Jersey and Bridgeport, as well as regional economic engines like Boston are also going strong. For example, Boston had an average asking rent rate of $8.74 per square foot and a 9.7% year-over-year increase. Additionally, leases signed over the past 12 months were inked at an average $11.53 per square foot. 

Similarly, New Jersey closed the first quarter of 2023 with in-place rents at $9.00 per square foot. It also reached an 8.6% growth rate over the past 12 months, with new leases averaging $12.98 per square foot. Bridgeport in-place rents rested at $7.75 per square foot but logged an 8.3% increase over the last 12 months, with new leases signed at $11.15 per square foot on average. 

In fact, Boston, New Jersey and Bridgeport posted three of the highest lease rate increases among the country’s leading industrial markets, with Boston ranking #3, New Jersey #4 and Bridgeport #5, nationally. The Northeast’s fourth leading market, Philadelphia, featured an average in-place rent rate of $6.77 per square foot, slightly lower than the national average of $7.15 per square foot. Similarly, Philadelphia's year-over-year rent growth of 5.5% was also below the national average increase of 7.1%. 

In terms of vacancies, the Northeast’s leading markets were mostly in line or under the national average industrial vacancy rate of 3.9%. Specifically, both New Jersey and Bridgeport closed the first quarter with a mere 2.6% of their respective stocks available for lease, while Philadelphia equaled the national vacancy rate.  

Northeast Regional Highlights 

Although Philadelphia had the weakest industrial rents and rent growth among the Northeast’s top markets, it did, however, lead the region in industrial development. Specifically, the market had 18 million square feet of industrial space under construction as of late March, accounting for 4.3% of its existing stock. This was the largest development pipeline in the region by a significant margin, both in terms of square footage as well as on a percentage-of-stock basis. Philadelphia also had an additional 5.3% of stock in the planning stages which would more than double its current supply pipeline. 

New Jersey’s 10.68-million-square-foot under-construction stock was the second largest pipeline in the region by square footage. As for the Bridgeport-New Haven market, it featured a modest pipeline of just 1.27 million square feet of space, which would increase its existing stock by 0.6%.  

New Jersey led the region not only in terms of in-place and new industrial rents, but also in terms of sales. Specifically, its $345 million year-to-date sales volume was the third largest nationwide, while Boston’s $218 million year-to-date sales total was the sixth highest in the country. New Jersey also had the regions highest price per square foot which stood at $221 at the end of the first quarter with the Bridgeport-New Haven market next at $151 per square foot, Boston at $132 per square foot and Philadelphia at $110 per square foot year-to-date. 

Economic Indicators: Producer Inflation Nears Pre-Pandemic Levels 

Producer costs, which exploded in the early days of the pandemic, have come down to pre-pandemic levels, a good sign for the economy and commercial real estate as a whole. 

The year-over-year increase in the Producer Price Index’s final demand metric compiled by the Bureau of Labor Statistics fell in March to 2.8%, coming in well below 2021 peaks. This was also the lowest level since January 2021. The significance of PPI is that it measures the inflation of costs for producers of goods and services. But shipping and labor issues that created the pandemic-era PPI increases are easing. 

Producer Price Index

Higher producer costs are a big contributor to inflation and erode consumer purchasing power. As products become more expensive, consumers buy less for the same amount of money, which in turn reduces demand for industrial, logistics and retail space. Conversely, lower producer costs contribute to the deceleration of the Consumer Price Index and could factor into the Federal Reserve’s decision on whether to put the brakes on further interest rate increases. 

Download the complete April 2023 report for a full picture of how U.S. industrial markets fared in the first three months of the year, including insights on industry and economic recovery fundamentals. 

You can also see our previous industrial reports.

Methodology

The monthly CommercialEdge national industrial real estate report considers data recorded throughout the course of 12 months and tracks top U.S. industrial markets with a focus on average rents; vacancies (including subleases but excluding owner-occupied properties); deals closed; pipeline yield; forecasts; and the economic indicators most relevant to the performance of the industrial sector.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Average Rents —Provided by Yardi Market Expert, a cutting-edge service that uses anonymized and aggregated data from other Yardi platforms to provide the most accurate rental and expense information available.
• Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of office space in that market. Owner-occupied buildings are not included in vacancy calculations.

Stage of the supply pipeline:

• Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.
• Under Construction — Buildings for which construction and excavation has begun.

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.   

Market boundaries in the CommercialEdge office report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources.