Industrial Development Slows as Sector Adapts to Economic Conditions

Key Takeaways: 

• National industrial in-place rents averaged $7.18 per square foot in April, up 7.3% year-over-year   
• The national vacancy rate stood at 4.1%, up 20 basis points month-over-month  
• 616 million square feet of industrial space was under construction nationwide  
• Industrial transactions totaled $12.6 billion at an average sale price of $134.10 per square foot  
• Western markets continued to post the widest lease spreads, with the Inland Empire registering a spread of $8.72 per square foot 
• Detroit claimed the highest rent growth in the Midwest, closing April with 6.4% year-over-year appreciation 
• Dallas led the South in industrial development with a 56 million-square-foot pipeline  
• New Jersey closed the largest volume of industrial sales in the Northeast at $473 million  

The industrial sector continued its momentum through April, despite uncertainties in the macroeconomic environment, like maturing loans, tightening loan underwriting and a slowdown in import volumes, according to our latest U.S. industrial market report. 

Average industrial in-place rents increased three cents from March to April to reach $7.18 per square foot. At the same time, new leases inked in the past 12 months averaged $9.58 per square foot, $2.40 higher than in-place contracts. 

“Even as development starts are slowing, this is compared to the record breaking last few years. Historically speaking, the construction pipeline is substantial, and we continue to see very healthy rents being reached on newly signed leases.”

Peter Kolaczynski, CommercialEdge Senior Manager 

Southern California recorded the widest lease spreads, as has been consistently the case in the past years: Leases signed in the past 12 months cost $8.72 more in the Inland Empire and $8.03 more in Los Angeles, respectively. These West Coast markets also posted some of the lowest vacancies in the country, resting at 1.9% in the Inland Empire and 2% in Los Angeles.  

Although the recent fall in import volumes was more pronounced on the West Coast compared to other U.S. port markets, climbing rents and low vacancy rates indicate that the region’s industrial markets will maintain their strength. Nonetheless, sales and development are expected to continue to slow both regionally as well as nationally. 

Rents and Occupancy: Demand for Space Slows but Remains Positive 

The national in-place rent for industrial space averaged $7.18 per square foot in April, an increase of three cents from March and up 7.3% year-over-year. The average rate for new leases signed in the past 12 months rose to $9.58 per square foot through March, $2.40 more than the overall average. 

Meanwhile, leading coastal markets continued to see the largest gains in the average rate of in-place rents, which rose 18.2% in the Inland Empire, 12.3% in Los Angeles, 9.7% in New Jersey and 9.2% in Boston. 

The national industrial vacancy rate increased 20 basis points month-over-month to 4.1% in April. The lowest industrial vacancy rates in the country were recorded in Columbus (1.7%), the Inland Empire (1.9%), Los Angeles (2.0%) and Charlotte (2.4%). Industrial occupancy rates remained solid despite the record levels of new supply delivered in recent years and a construction pipeline equal to 3.4% of stock. 

Average Rent by Metro 

However, occupier demand and absorption have started to cool as consumer spending shrank and companies tightened their belts, preparing for a possible downturn in the second half of 2023. So, while demand continues to be strong, it is slowing somewhat, particularly among consumer-oriented businesses. 

Firms that operate in e-commerce and brick-and-mortar retail segments are trying to conserve cash and have become more conservative in projecting space needs. A prime example is Amazon, which decreased its industrial footprint in recent months by canceling already-announced expansion plans, subleasing space, and closing a few facilities. Amazon remains the biggest industrial user and continues to expand, while growth is slowing to a more cautious pace. 

Supply: New Construction Starts Slowing 

Nationally, 616.4 million square feet of new industrial space was under construction as of April, equal to 3.4% of the national stock. An additional 721.9 million square feet were in the planning stages,  according to the latest U.S. industrial market report. 

In the first four months of the year, a total of 162.4 million square feet of industrial space were delivered. The Dallas - Fort Worth market delivered the largest volume this year, with 17.6 million square feet of new space coming online. This is more than twice the amount of the second-highest market, Indianapolis, where developers completed a total of 8.3 million square feet of industrial space so far in 2023. 

National Industrial Supply Pipeline Trend  

While the amount of space under construction remained high, new starts have started to slow and developers broke ground on just 86.8 million square feet of industrial space by the end of April. This reflects growing concerns about cooling demand, current economic conditions as well as banks tightening their underwriting standards in the wake of the recent failures of SVB Bank, Signature Bank and others.  

Construction debt remains somewhat unavailable, as banks are financing relationship customers; private equity is taking up some of the slack, but terms and costs are far less favorable for borrowers. That means some projects won’t pencil out or will need more equity to proceed, industrial property outlooks predict. 

Transactions: Property Values Cool in 2023 

Nationally, $12.6 billion in industrial transactions were closed during the first four months of the year, according to the latest U.S. industrial market report. 

While the total sales volume has fallen since the Federal Reserve began raising interest rates last year, the average sale price of an industrial property has continued to grow, increasing from an average of $124 per square foot in 2022 to $134 so far this year, a solid increase of 7.7%, given the current environment, but noticeably lower from previous years. Average sale prices increased 26.6% between 2020 and 2021 and 13.7% between 2021 and 2022. And while industrial property values have cooled to a certain extent, they are still higher than most other property classes. 

2023 Year-to-Date Sales (Millions) 

Western Markets: Region Claims 5 Highest Sale Prices in the U.S. 

Despite the decline in import volumes, western industrial markets remained the priciest in the U.S. In Los Angeles, import volumes declined 31.5% year-over-year in April, while the average year-to-date industrial sale price rested at $403.66 per square foot, the highest price across the nation. 

In fact, the top five sale prices were all recorded in the West, with the Bay Area coming in second at $333.15 per square foot, followed by Orange County’s $316.20 per square foot, the Inland Empire’s $275.11 per square foot and Seattle’s $226.05 per square foot. The Inland Empire and the Bay Area also had the largest sales volumes nationally, with investors closing $1.66 billion and $802 million in industrial deals, respectively. 

West Regional Highlights 

Southern California remained hot, recording the highest industrial rent growth and some of the lowest vacancy rates nationwide. For example, in the Inland Empire, rents increased 18.2% year-over-year in April, while the vacancy rate stood at 1.9%, second only to Columbus’ 1.7% rate. The Inland Empire also registered the widest lease spread nationwide, with new contracts signed at $16.60 per square foot — $8.72 more than in-place rents. 

Los Angeles remained the second-hottest industrial market in the region, with a 2% vacancy rate and a 12.3% year-over-year rent growth. Additionally, leases signed over the past 12 months averaged $19.72 per square foot, $8.03 more than in-place rents. At the same time, some of the weakest fundamentals were recorded in Denver, where the industrial vacancy rate stood at 6.7%, while rents increased a mere 3.7%. 

Widest Lease Spreads Across the Top 30 Markets

Continuing the trends reported in previous CommercialEdge industrial real estate market reports, Phoenix remained the number one Western market for development, with 57.1 million square feet of industrial space under construction, equal to 16.3% of existing stock. Taking into account planned projects as well, Phoenix could potentially expand its industrial footprint by 39.5%. However, with the expected slowdown in development, it remains to be seen how much of the planned projects will materialize.  

Meanwhile, in terms of square footage, Orange County and Portland had the lowest under-construction pipelines, with just 570,858 and 1.3 million square feet of industrial space underway, respectively. 

Midwestern Markets: Detroit Continues to Record Most Robust Fundamentals in the Region 

Columbus remained the tightest industrial market in the U.S., with only 1.7% of space available for lease. Meanwhile, Indianapolis remained the next tightest market in the region, with its vacancy rate resting at 2.6%. Despite the high occupancy rates driven by the logistics sector, both Columbus and Indianapolis continued to post some of the slowest rent growth nationwide, coming in at $4.18 per square foot and $4.25 per square foot, respectively. 

Overall, all markets in the Midwest recorded asking rents below the national average of $7.18 per square foot and year-over-year rent growth also stayed below the 7.3% national average. The Twin Cities and Detroit came the closest to national figures, with in-place rents resting at $6.29 per square foot and $6.27 per square foot, respectively. However, while Detroit saw its rates increase 6.4% year-over-year in April, the Minneapolis-St. Paul market recorded an uptick of just 3.6% over the same period. 

Detroit also registered the widest lease spread in the region, with new leases costing $2.29 more than in-place rents. The next notable lease spreads were recorded in Chicago and Columbus, where new leases signed over the past 12 months were $1.24 and $1.16 above in-place rents, respectively. 

Midwest Regional Highlights 

On a percentage-of-stock basis, Columbus led the region in construction, with 13.2 million square feet of industrial space underway, accounting for 4.5% of existing inventory. Indianapolis had the second largest pipeline, with nearly 11 million square feet of space in development, representing 3.1% of its existing stock. Unsurprisingly, industry experts attribute the slower rent increases in these metros to the consistently large construction pipelines over the past quarters. Nonetheless, the national slowdown in development might help the markets reach equilibrium. 

Meanwhile, Chicago recorded the largest sales volume, with investors closing $414 million in industrial deals at $76.54 per square foot. The next largest sales volume was registered in Cincinnati, where industrial deals amounted to $288 million, with properties trading at $180.30 per square foot. Cincinnati was the only Midwestern market with a sale price above $100 per square foot also exceeding the $134.10 per square foot national average. Despite its robust fundamentals, Detroit was the most affordable market in the region and among the country’s top 30 markets, with properties trading at $68.78 per square foot. 

Southern Markets: Dallas Continues to Boast the Largest Pipeline in the South  

Thanks to strong population growth, a dynamic workforce and more developable land, the South has become a compelling region for new industrial development. Most of the markets here have a significant pipeline compared to their respective stocks but the Dallas – Fort Worth Metroplex remained the unchallenged leader. 

As of April, the Metroplex had the second largest inventory under construction nationwide, coming in after Phoenix, with 56.4 million square feet under construction, equal to 6.4% of its inventory. Considering projects in the planning stages, the metro could expand its inventory by 11.8%. However, with a vacancy rate of 5.5% (above the 4.1% national rate) developers are increasingly concerned about a possible oversupply.  

Industrial Space Under Construction (Million Sq. Ft.) 

Dallas – Fort Worth’s vacancy rate was outpaced only by the 5.6% rate recorded in Memphis and Houston’s 8.4% rate (also the highest rate nationwide). At the same time, the lowest industrial vacancy rate in the South was registered in Charlotte, coming in at 2.4%, followed by Atlanta’s 3.1% and Miami’s 3.4%. 

Miami also posted the highest lease rate, with in-place rents at $9.64 per square foot, up 8% year-over-year in April. Baltimore was the second priciest market, with lease rates resting at $7.18, up 5.6% over year-ago figures, while Memphis remained the most affordable market, with rents sitting at $3.62 per square foot, up a mere 3.7%. 

South Regional Highlights 

Nashville registered the widest lease spread in the region, with new leases signed over the past 12 months costing $9.31, around $4 above in-place rents. Tenants in Miami also inked at robust premiums, with new leases costing $3.95 more than in-place rents. 

Despite the more sluggish fundamentals in Houston, the metro recorded the largest sales volume and sale price in the South: A total of $466 million changed hands, with industrial properties trading at $134.86 per square foot — in line with the national average of $134.10 per square foot. Dallas recorded the next largest sales volume in the region: $372 million at $100.72 per square foot. 

Northeastern Markets: Boston & Bridgeport Post Widest Lease Spreads in the North  

New Jersey remained the leading Northeastern industrial market in terms of occupancy rates, with only 2.9% of space available across the market. It was followed by Bridgeport, Conn., at 4%, Philadelphia at 4.2% and Boston at 6.9%. New Jersey also saw a robust uptick in industrial rents in the previous 12 months, climbing 9.7%. This was above the 7.3% year-over-year national industrial rent growth and the third highest in the country. Rent growth in New Jersey will likely persist, as new lease premiums have reached $4.73 per square foot. 

Nonetheless, the widest lease spreads in the Northeast were recorded in Boston and Bridgeport, Conn., where new leases signed over the past 12 months cost $5.33 and $5.17 more than in-place rents, respectively. The second-largest rent growth in the region was also registered in Boston, with rents increasing 9.2% year-over-year in April. Conversely, Philadelphia remained the most affordable industrial market in the North, with in-place rents at $6.84 per square foot and new leases signed at $9.58 per square foot over the past 12 months. 

Northeast regional highlights 

Across leading Northeastern industrial markets, investors closed around $1.16 billion in transactions year-to-date through April. New Jersey led the region with $473 million in sales at a price per square foot of $202.86 — also the highest in the region. Although Bridgeport, Conn., saw the smallest sales volume at $191 million, the market also recorded the second-largest sale price in the region at $141.80 per square foot. 

Philadelphia led the region in terms of new supply, with 17.7 million square feet of industrial space under construction, equal to 4.2% of total stock. Meanwhile, Boston’s 5.8 million-square-foot pipeline accounted for 2.5% of its existing inventory, and New Jersey’s 9.3 million underway space represented 1.7%.  At the other end of the spectrum, Bridgeport had the lowest pipeline with 1.2 million square feet of space underway, equal to 0.5% of local stock. 

Economic Indicators: Warehouse and Storage Employment Levels Off 

After decreasing for nine consecutive months, the warehousing and storage subsector added 4,000 jobs in April, according to the Bureau of Labor Statistics. 

Warehousing and storage employment was already growing quickly in the second half of the last decade, but the pandemic-driven e-commerce boom led the subsector to add workers at a frenzied pace. The leading firm is of course Amazon, which expanded rapidly during the pandemic, looking to add new facilities and workers as quickly as they feasibly could. However, last year Amazon admitted it overexpanded and has since slowed on hiring, as well as paused or delayed massive new fulfillment centers. Warehousing and storage employment is now only just slightly ahead of its pre-pandemic trendline. 

Warehousing and Storage Employment 

Despite the subsector cooling in recent months, there were twice as many warehousing and storage workers in April as there were at the end of 2016. 

Trends & Industry News: East Coast Ports Threaten Western Dominance 

After a prolonged period of bottlenecks and backlogs, the supply chain has normalized and the new normal for major U.S. ports is emerging, according to industrial market outlooks. 

Import volume fell 11.8% year-over-year in March, according to the U.S. Census Bureau. Consumer demand for goods has fallen steadily over recent quarters as pandemic restrictions have eased, allowing people to spend money on services again, while inflation has eaten away at discretionary income.  

Further depressing import volumes is the process of destocking. In response to supply-chain backlogs, many companies beefed up inventories. Inventory-to-sales ratios have remained elevated so far this year, and imports are unlikely to rebound until some existing inventories are cleared. 

Volume at nearly all major ports declined year-over-year in the first quarter, reflecting issues such as the slowdown of consumer trade. But the impact has been more pronounced at ports in the Western U.S. Through April 2023, container volumes were down year-over-year in eight of the top nine U.S. ports, with Houston (up 3.4%) the lone exception, according to local port authorities and Savills. Year-over-year volume was down at other major ports as well, ranging between 9.0% (Virginia) and 31.5% (Los Angeles). West Coast ports were under pre-pandemic levels, while major ports in other parts of the country remain above 2019 levels. 

Since the Panama Canal Expansion was completed in 2016, ports along the East Coast and in the Gulf of Mexico have been expanding and looking to win shipping business away from Southern California ports, which handle roughly 40% of imports from Asia. The Georgia Port Authority, for example, expedited $500 million in capacity expansion projects last year. 

Eastern seaports too, have benefited from capital improvements, while Western ports have struggled with backlogs, a lack of industrial space and labor issues that spooked shipping companies. The labor contract that covers more than 22,000 workers at 22 ports along the West Coast expired in July and a new collective bargaining agreement has yet to be achieved, although a tentative agreement was made on key issues in April and a full agreement appears to be within reach. The impact on West Coast industrial markets so far is minimal, as vacancy rates remain razor-thin and rent growth is robust.  

Download the complete May 2023 report for a full picture of how U.S. industrial markets fared in the first four 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.