Industrial Sector Pinched by Interest Rate Hikes 

Key Takeaways: 

  • National industrial in-place rents averaged $7.39 per square foot in July, up 7.5% year-over-year       
  • The national vacancy rate stood at 4.4%, down 10 basis points month-over-month    
  • Nationwide, 595.6 million square feet of industrial space was under construction    
  • Industrial transactions totaled $27 billion through July, at an average sale price of $131 per square foot   
  • The Bay Area saw the highest average sale price in the nation year-to-date, coming in at $344 per square foot  
  • Indianapolis registered both the lowest vacancy rate and rent growth in the Midwest 
  • Miami recorded the highest rent growth in the South, up 9% year-over-year in July 
  • New Jersey logged $1.15 billion in transactions, the largest volume in the Northeast 

The Federal Reserve’s fight against inflation has led to multiple interest rate hikes over the last 18 months. As capital has become scarcer and more expensive, industrial construction starts and sales have slowed. But rent growth remained strong and vacancies tight, according to our latest U.S. industrial market report, even as leasing activity slowed due to tenants having to deal with the converging forces of higher rates, economic uncertainty, and normalizing e-commerce demand.  

After 586.2 million square feet of industrial space broke ground in 2021 and 614.5 million square feet last year, developers started construction on only 177.8 million square feet in 2023. High material and labor costs along with normalizing demand in recent quarters were already putting downward pressure on development. Now, with the increased cost of construction financing, many developers are pressing pause on projects. 

Interest rates may have slowed sales volume but have not yet impacted the average price of the properties that do sell. The U.S. industrial sales volume was $98.5 billion in 2022 and $128.2 billion in 2021, but this year, industrial deal totaled only $27 billion through the end of July. 

At the same time, the national average sale price has increased slightly from $124 per square foot in 2022 to $131 per square foot in 2023. Some of the slowdown in sales may be due to a bid-ask gap between buyers and sellers.  

“The data continues to show the collective deep breath that we anticipated the industrial market taking as it comes off of the record growth of the past few years.”

Peter Kolaczynski, CommercialEdge Senior Manager

Given strong rent growth and low vacancies, owners are comfortable holding properties, especially as many of the large institutional owners in the sector are not highly leveraged and thus are not sensitive to rate increases. Meanwhile, buyers may be hesitant to pay historically high figures when capital is expensive. 

Even within a tight interest rate environment, industrial is performing better than other asset classes, and long-term demand drivers remain positive. The reshoring and nearshoring of manufacturing continue to pick up steam. Although e-commerce cooled in the quarters coming out of the pandemic, the gains that were made have become entrenched.  

Our industrial market outlook anticipates that the question of soft landing versus recession will be settled once inflation cools. When interest rates will fall, the appetite for development and sales will return in force, though likely not to levels seen during the pandemic.  

Rents and Occupancy: Rent Gains Remain Uneven Across the Country  

National in-place rents for industrial space averaged $7.39 per square foot in July, an increase of six cents from June and up 7.5% year-over-year. The average rate for new leases signed in the last 12 months rose to $9.90 per square foot in July, $2.51 more than the average for all leases. At the same time, the national industrial vacancy rate was 4.4%, down 10 basis points compared to the previous month. 

Average Rent by Metro 

While California markets continued to lead in rent growth, with increases as high as 17.6% year-over-year in the Inland Empire, Midwestern metros failed to capture rent gains. The lowest rent increases were recorded in Indianapolis (up only 3.2% year-over-year), Kansas City (3.6%) and Chicago (3.9%). The modest rent growth in the Midwest can be attributed to the heavier stock expansion of recent years, as the region has significantly fewer geographic constraints compared to coastal markets. 

With high rent growth, coastal markets also saw the largest spreads between in-place rents and the cost of new leases. For instance, in the Inland Empire, a lease signed in the last 12 months averaged $18.34 per square foot, $9.37 more per square foot than the average of in-place rents.  

At the same time, new leases cost $7.10 more per square foot in the Bay Area, $6.91 more in Los Angeles, $5.33 more in Orange County and $4.38 more in Miami. Midwestern markets, such as Detroit, St. Louis, the Twin Cities, Kansas City and Indianapolis saw little to no premiums for new leases. While the Southeast has generally been a good region for industrial rent gains, Memphis logged a very small premium ($0.17) for new leases while Charlotte saw none. 

Supply: Electric Vehicles, Semiconductors Propel Manufacturing 

Across the U.S., 595.6 million square feet of industrial space was under construction at the end of July, accounting for 3.2% of existing inventory, according to our latest industrial market report.  

As demand for logistics and warehouse space continues to normalize, manufacturing projects are becoming more frequent. Since the beginning of 2022, a total of 94 million square feet of manufacturing facilities have broken ground, with the majority focused on semiconductor, battery and electric vehicle production.  

National Industrial Supply Pipeline Trend  

For example, Hyundai has broken ground on a 17 million-square-foot facility near Savannah, hoping to start vehicle production in early 2025. In Austin, Samsung is building a 6 million-square-foot space to manufacture semiconductors, while Tesla’s 1.4 million-square-foot site will build battery cathodes.  

Additionally, Ford began construction of a 4 million-square-foot EV battery plant in Louisville last year as a direct response to the incentives of the Inflation Reduction Act. Specifically, the act provides a $7,500 tax credit for the purchase of a U.S.-manufactured electric vehicle. Meanwhile, incentives and tax credits available through the CHIPS and Science Act legislative packages are driving the boom in semiconductor production. 

Transactions: Investor Appetite Still Highest in California 

Nationally, a total of $26.9 billion in industrial sales has been recorded through the end of July, with properties trading at an average of $131 per square foot. The markets with the highest average sale prices can all be found in California, led by the Bay Area ($344 per square foot), Los Angeles ($335), Orange County ($317) and the Inland Empire ($260). 

2023 Year-to-Date Sales (Millions) 

The Bay Area has also seen one of the highest sales volumes this year, with $1.4 billion in transactions through the end of July. While Southern California generally sees much of its industrial activity driven by logistics, the Bay Area has a high number of manufacturers, due to the region’s specialization in technology. For example, the market’s largest deal was hard-drive manufacturer Seagate’s 47488 Kato Road campus sale-leaseback to Madison Capital for $260 million.  

Nonetheless, distribution and logistics also play a significant role in the Bay Area, thanks to the Port of Oakland being one of the busiest in the country — even though it handles only a fraction of the containers the Southern portion of the state does.  

Western Markets: The Bay Area Claims Highest Average Sale Price in the U.S. 

With record deliveries since the onset of the pandemic and the normalizing demand for industrial space, the Inland Empire has experienced a slight shift in market conditions in recent months. The market's vacancy rate rose to 2.9% in July, above the 1.6% recorded at the beginning of the year. 

Nonetheless, the Inland Empire remained one of the tightest industrial markets in the U.S., exceeded only by Nashville's 2% and Indianapolis' 2.8% vacancy rate. At the same time, in other Southern California markets, such as Orange County and Los Angeles, the industrial vacancy rate stood at 3.5% and 3.8%, respectively. 

West Regional Highlights 

Southern California, however, continued to lead the U.S. in rent growth, with lease rates rising 17.6% year-over-year in the Inland Empire, 12.6% in Los Angeles and 10.2% in Orange County in July. The next largest gains in the West were registered in Phoenix and Seattle, with rents climbing 8.1% and 8%, respectively, over the same period.  

Boasting some of the highest rent growth rates, Western U.S. industrial markets remained the most expensive in the country — $13.83 per square foot in Orange County, $13.06 per square foot in Los Angeles, and $12.49 per square foot for industrial space in the Bay Area.  

Meanwhile, the largest premium for new leases signed over the past 12 months was recorded in the Inland Empire, coming in at an average of $9.37 per square foot. The next largest premiums for new leases were recorded in the Bay Area ($7.10 per square foot) and in Los Angeles ($6.91). 

With strong key fundamentals, California markets also continued to record the largest transaction volumes year-to-date through July. The Inland Empire led the nation with $2.81 billion in sales, followed by Los Angeles’ $1.81 billion and the Bay Area’s $1.43 billion volume. Phoenix saw the fifth largest sales volume in the nation, with $1.3 billion in closed industrial deals.  

Sale Price Per Square Foot 

Manufacturing facilities drove sales in the Bay Area, resulting in the country’s highest average industrial sale price at $344 per square foot. In contrast, Denver recorded the lowest average sale price in the West at $127 per square foot, and was the region’s only market with an average sale price below the $131 per square foot national average.  

Despite the national cooldown in development, Phoenix continued to be a hot market for industrial construction. As of July, the market had 56.7 million square feet of space underway, equal to 15.9% of the local stock. The Inland Empire and Denver followed with 31.9 million square feet (representing 5.1% of stock) and 11.5 million square feet (4.5% of stock), respectively, of industrial space in the pipeline.  

Midwestern Markets: Rent Gains Remain Moderate in the Midwest 

Logistics hubs in the Midwest have consistently recorded some of the lowest vacancy rates in recent quarters, but heavier development in the region kept rent growth slow. With only 2.8% of its industrial space available for lease, Indianapolis recorded a slight 3.2% rent growth in July compared to year-ago figures. Only Charlotte saw slower growth among the top U.S. industrial markets, inching up 2.9% year-over-year in July. 

Overall, the most significant industrial rent growth in the Midwest was recorded in Detroit (up 5.5% year-over-year in July) and Columbus (up 4.7%). In July, Detroit also had the highest in-place rents at $6.76 per square foot. At the same time, new leases signed in Motor City over the past 12 months cost $6.62 per square foot — 14 cents less per square foot. 

The widest lease spreads in the Midwest were recorded in Chicago and Columbus, where new leases inked over the past 12 months cost $1.55 more per square foot and $1.16 more per square foot, respectively. 

Midwest Regional Highlights 

Since Midwestern markets have fewer geographic constraints, they have allowed for a quick supply response to increased demand. This has given tenants leverage in rent negotiations that they wouldn't have had in port markets. For example, since the beginning of 2021, Chicago's stock has risen by 6.6%, Kansas City's by 9.8%, and Indianapolis' by 14.1%. 

As of July, Columbus led development in the Midwest on a percentage-of-stock basis, with 3.5% of its stock underway, followed by Indianapolis and Kansas City, with 3% and 2.9% of inventory under construction, respectively. But on a square footage basis, Chicago remained the leader, with 24.2 million square feet of industrial space in the pipeline. 

Chicago also recorded the largest sales volume in the Midwest in the first seven months of the year, with investors closing $983 million in industrial deals at an average of $87 per square foot. Minneapolis – St. Paul saw the second-largest transaction volume in the region over the same period, totaling $551 million, with properties trading at an average of $94 per square foot. 

Cincinnati and Kansas City were the only markets in the Midwest with sale prices above $100 per square foot, coming in at $106 per square foot and $104 per square foot, respectively, but still below the $131 per square foot national average. 

Southern Markets: Dallas - Fort Worth Remains Home to Most Significant Development Pipeline in the Region 

In the South, the lowest vacancy rates at the end of July were recorded in Nashville at 2%, Atlanta at 3%, Dallas - Fort Worth at 3.7% and Baltimore at 4.2%. These four markets were also the only in the South to record vacancy rates below the national average of 4.4%. 

And while Miami had a vacancy rate of 4.5% at the end of July, the metro recorded the highest rent growth in the South, up 9% year-over-year. The next highest rent gains in the region were more in line with the national average of 7.5%: Atlanta saw its rates increase by 7.4% and Dallas - Fort Worth by 7.1%. Nashville came in slightly below, with lease rates growing 6.7% over year-ago figures. 

South Regional Highlights 

These gains also generated some of the widest lease spreads in the region, with Miami in the lead: While in-place rents averaged $10.31 per square foot here, new contracts signed over the past 12 months averaged $14.69 per square foot. At the same time, Nashville’s in-place rents stood at $5.59 per square foot, while new leases were inked at $8.51 per square foot. Similarly, Baltimore was another Southern market with a more notable lease spread: new leases signed over the past 12 months cost $2.07 more per square foot than in-place rents. 

Dallas – Fort Worth remained home to the most significant development pipeline in the South and was outpaced only by Phoenix nationally. At the end of July, Dallas – Fort Worth had a new supply pipeline of 56.7 million square feet, which is set to expand the market’s already massive industrial footprint by 5.7% — the highest rate among Southern markets. Considering planned projects, the market’s inventory could grow by as much as 11.2% in the near term. 

Despite recording the slowest rent growth nationwide, at just 2.9% year-over-year in July, Charlotte had the second-largest development pipeline on a percentage-of-stock basis, with 4.5% of its inventory underway, representing 13.8 million square feet of industrial space. On the other end of the spectrum stood Baltimore, with just 0.8% of its stock in the pipeline, equal to 1.7 million square feet of space. 

Industrial Space Under Construction & Planned (% of stock) 

Regarding sale prices, Houston was the priciest in the region, with properties trading at $130 per square foot year-to-date. Nashville followed with $116 per square foot, while the rate for Dallas industrial space averaged $114 per square foot, tying Tampa for third place. In contrast, the most affordable market in the South was Memphis, where investors traded industrial assets for an average of $61 per square foot. 

As for sales volume, Houston claimed the top spot in the region again, with $1.38 billion in transactions. Dallas was the only other Southern market to exceed $1 billion in sales, with year-to-date transactions totaling $1.13 billion. 

Northeastern Markets: Boston Captures Most Notable Rent Gains in the Region 

While Southern California continues to lead in asking rates and rent growth among the top U.S. industrial markets, Northeastern economic engines such as Boston and consumer hubs like New Jersey and Bridgeport, Conn., also recorded notable growth. 

Boston, for example, had an average asking rate of $9.55 per square foot and a 9.5% year-over-year increase. Additionally, new leases signed over the past 12 months stood at $12.76 per square foot, $3.21 above in-place rents. 

Similarly, New Jersey closed July with in-place rents at $9.66 per square foot, up 8.5% over year-ago figures. Lease spreads were also highest in New Jersey, with news leases averaging $13.52 per square foot, $3.86 more than in-place rents. Bridgeport in-place rents rested at $8.68 per square foot but logged an 8.4% increase over the last 12 months, with new leases signed at $12.52 per square foot on average. 

Northeast regional highlights 

The Northeast's fourth leading market, Philadelphia, was slightly behind the national average year-over-year rent growth of 7.5%, increasing 6.6% to $7.29 per square foot at the end of July. Meanwhile, leases signed over the past 12 months averaged $9.57 per square foot, $2.28 more than in-place rents. 

Despite contending with the weakest fundamentals among the Northeast’s leading markets, Philadelphia led the region in development. As of July, developers had 17.4 million square feet of industrial space in the pipeline, equal to 4.1% of the local inventory. On a percentage-of-stock basis, however, Boston had the second-largest pipeline, with 2.3% of its stock underway, encompassing 5.5 million square feet of industrial space. 

In terms of sales, New Jersey's transaction volume of $1.15 billion ranked sixth in the country, placing it at the forefront of Northeastern markets. However, the market's year-to-date sale price of $221 was well below the prices recorded in the West's leading port markets, such as the Bay Area's average of $344 per square foot.  

At $141 per square foot, Boston registered the second-highest year-to-date sale price in the Northeast. However, its $469 million transaction volume was outpaced by Philadelphia's $535 million total, which averaged $114 per square foot. Meanwhile, in Bridgeport, Conn., investors traded $335 million in industrial sales at $96 per square foot. 

Economic Indicators: Warehouse Employment Continues to Slide 

The warehousing and storage sector of the labor market lost 5,600 workers in July and 57,500 over the last year, decreasing 3% year-over-year, according to the Bureau of Labor Statistics. Overall, the sector has lost workers in 12 of the last 13 months, with the one exception being October, which was unchanged from the previous month. 

Warehousing and Storage Employment 

It is no coincidence that the decline in warehouse and storage employment began around the time Amazon was reported to be pulling back on hiring and was subleasing millions of square feet of space last year. The online retail behemoth is by far the biggest employer in the sector and its moves will have an outsized impact. Amazon expanded rapidly during the pandemic but began to pull back in the second quarter of 2022 when consumers returned to in-person shopping and it became clear that e-commerce growth was leveling off. 

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

You can also see our previous industrial reports.


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.   

Evelyn is a creative writer covering commercial real estate trends and insights in the U.S. Evelyn was previously a senior associate editor at Multi-Housing News and Commercial Property Executive. She has an academic background in Journalism and Irish Studies. Evelyn has been covering the CRE industry since 2017. Reach her via email.

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