Industrial Sector Maintains Momentum Despite Uptick in Vacancy Rates   

Key Takeaways: 

• National industrial in-place rents averaged $7.55 per square foot in October, up 7.6% year-over-year     
• The national vacancy rate stood at 4.6%, unchanged month-over-month  
• Nearly 513 million square feet of industrial space was under construction nationwide  
• Industrial transactions totaled $44.4 billion through October, trading at an average sale price of $131 per square foot  
• Western markets claimed eight of the top 10 highest sale prices nationwide, with the Bay Area closing October at an average of $340 per square foot 
• Chicago logged the largest sales volume in the Midwest, closing $1.63 billion in industrial deals 
• Dallas-Fort Worth led the South in development with a 42.4 million-square-foot pipeline and sales with a $2.29 billion deal volume 
• At $3.95 per square foot, New Jersey lease premiums were the highest in the Northeast 

Despite challenges in the macroeconomic environment, industrial properties remained one of the most sought-after commercial real estate asset classes nationwide. According to our latest industrial market report, investors closed $44.4 billion in industrial deals year-to-date through October, compared to the $27.9 billion recorded in office sales over the same period. 

And while heavy deliveries put some upward pressure on industrial vacancy rates, which rose 70 basis points from 3.9% in January 2023 to 4.6% in October, rent growth remained healthy across leading markets in the U.S. The most substantial rent increases continued to be logged in coastal markets, with the most significant growth recorded in the Inland Empire, up 15.2% year-over-year in October. 

New leases are still commanding a significant premium, continuing the past years’ momentum in pricing. We are watching sublease availabilities closer, specifically as Amazon puts large newer spaces on the market, but any initial repercussions will likely be localized.

Peter Kolaczynski, CommercialEdge Director

Overall, the 30 largest industrial markets in the U.S. all recorded rent growth over year-ago figures, with the lowest increase seen in Cincinnati — the Midwestern market recorded a 3.7% uptick in lease rates year-over-year in October.  

Rents and Occupancy: Record Levels of New Supply Put Upward Pressure on U.S. Industrial Vacancy Rates 

Industrial rents have continued to increase in the country’s leading industrial market, with the national in-place rents for industrial space averaging $7.55 per square foot in October. This represented a 7.6% year-over-year increase and a five-cent uptick over September figures. The average rate for new leases signed in the last 12 months rose to $10.28 per square foot, $2.72 more than the average for all leases. 

Coastal markets continued to see the widest spread between new leases and the average for all leases. Even as logistics demand normalized in 2023, tenants still paid high premiums for new leases in markets with access to a shipping port. For example, in the Inland Empire, a new lease signed in the last 12 months cost $18.49 per square foot, $9.32 more per square foot than the market average.  

Average Rent by Metro 

Other markets with wide lease spreads included Los Angeles ($6.99 more per square foot) and the Bay Area ($5.72 more per square foot). Outside California, Miami ($5.19), Seattle ($4.91) and New Jersey ($3.95) were among the markets with significant premiums. 

The U.S. industrial vacancy rate stood at 4.6% in October, unchanged from the previous month. Record levels of new supply have caused the national industrial vacancy rate to tick up slowly this year from 3.9% in January, a 70-basis point increase year-to-date. 

Supply: Industrial Construction is Concentrated in Just a Few Top Markets

A total of 512.5 million square feet of industrial supply were under construction as of October, accounting for 2.7% of existing inventory, our latest U.S. industrial market report reveals.   

Although new supply levels remained historically high, much of the new stock being built is concentrated in a few markets. More than a quarter of the new supply currently under construction is located in just five markets, and half is in the top 18 markets. 

National Industrial Supply Pipeline Trend (MSF)

Nationwide, Phoenix and Dallas-Fort Worth continued to boast the largest development pipelines, with 47.3 million square feet and 42.42 million square feet under construction, respectively. In terms of square footage, the Inland Empire had the third-largest pipeline, with under-construction projects encompassing 25.7 million square feet of industrial space.  

Rising construction costs, difficulties in obtaining financing, development pushbacks and a fear of possible oversupply, however, will likely continue to slow development in these markets, our industrial market outlook indicates.  

Transactions: 2023 Deal Flow Remains Significantly Below 2022 Levels

Nationally, $44.4 billion of industrial transactions have been logged so far this year, our industrial property market report shows. This is significantly below the $71.9 billion recorded over the same period last year.  

Even as interest rate hikes have caused investors to pull back across all real estate asset classes, the average sale price of an industrial asset has increased slightly this year. Properties have traded at an average of $131 per square foot in 2023, representing an increase of 6.8% over 2022.  

2023 Year-to-Date Sales (Millions) 

Across the four regions highlighted in our report, the West recorded the largest sales volume, with investors trading a total of $13.5 billion across the region’s top markets. The South followed with $8.05 billion in closed industrial sales. Meanwhile, top markets in the Midwest and Northeast recorded $4.9 billion and $4 billion in sales, respectively.  

Western Markets: The Inland Empire and Los Angeles Record Largest Sales Volumes Nationwide 

With high lease prices and robust rent growth, industrial markets in the West have consistently outperformed other regions and remained among the most attractive to investors nationwide. 

As a result, the West claimed eight of the top 10 highest average sale prices nationwide year-to-date through October, with the Bay Area ranking on the top spot with $340 per square foot. Los Angeles followed at $314 per square foot, and Orange County was close behind with $304 per square foot. Next up was the Inland Empire, with a price of $250 per square foot. 

The Inland Empire and Los Angeles also had the largest sales volumes year-to-date across the U.S. — $3.73 billion and $3.55 billion, respectively. The Bay Area had the fourth-largest volume nationwide, logging $2.27 billion in industrial sales. 

Year-to-date Sale Price Per Square Foot  

Although Phoenix has been benefiting from Southern California’s spillover effect and has recently become one of the most sought-after industrial markets, investment activity has slowed in the metro this year. After seeing more than $10 billion in sales in 2021 and 2022 combined, only $1.94 billion in sales occurred in 2023. The price per square foot has fallen 19% this year to $158. 

Although the industrial vacancy rate ticked up in Southern California, mostly due to new space coming online, the region recorded the highest rent growth year-over-year in October. For example, rents increased 15.2% in the Inland Empire over the past 12 months, while the vacancy rate stood at 4.3% at the end of October. The Inland Empire also registered the widest lease spread nationwide, with new contracts signed at $18.49 per square foot — $9.32 more than in-place rents. 

West Regional Highlights   

Orange County and Los Angeles also saw robust rent growth, both markets registering a 12.3% year-over-year increase, to $14.01 per square foot and $13.58 per square foot, respectively. Orange County’s vacancy rate stood at 4.6%, in line with the national figure; meanwhile, Los Angeles had 5.9% of its space available for lease.  

Overall, amid western markets, Phoenix recorded the lowest vacancy rate, coming in at 2.4% at the end of October. The market also saw asking rents grow 7.5% year-over-year, reaching $8.41 per square foot. At the same time, new leases signed over the past 12 months averaged $10.96 per square foot, $2.55 more than in-place rents.  

Phoenix remained the most active market for development nationwide, with 47.3 million square feet of industrial space under construction, equal to 12.7% of existing stock. In terms of square footage, Orange County and Portland had the lowest under-construction pipelines, with 1 million square feet and 563,594 square feet of industrial space underway, respectively. 

Midwestern Markets: Chicago Leads the Region With $1.63 Billion in Sales  

In contrast with Western markets, industrial hubs in the Midwest continued to record some of the weakest fundamentals in October. Columbus experienced the largest increase in rents in the region, rising 6% over year-ago figures, well below the national rate of 7.6%. In contrast, Cincinnati saw the lowest increase in rent rates in the region and nationwide, up just 3.7% year-over-year to $4.73 per square foot.  

Overall, all Midwestern markets recorded asking rents below the national average, with Detroit ($6.68 per square foot) and Twin Cities ($6.61 per square foot) prices coming the closest to the national figure. Chicago followed with in-place rents at $5.87 per square foot.  

Midwest Regional Highlights 

Over the first 10 months of the year, investors closed $4.91 billion in industrial sales across leading Midwest markets — Chicago was the only market with a transaction volume north of $1 billion. The metro logged $1.63 billion in sales year-to-date through October at an average sale price of $87 per square foot.  

The Twin Cities saw the next-largest sales volume, with industrial deals amounting to $852 million, closed at an average of $97 per square foot. Indianapolis and Cincinnati followed with $668 million and $552 million in sales, respectively. Industrial properties traded at an average of $104 per square foot in Indianapolis and $99 per square foot in Cincinnati.  

In October, Kansas City was the leading city in the Midwest for industrial development: The market’s pipeline represented 3.7% of total stock, with 10.2 million square feet under construction. Columbus (7.5 million square feet) and Indianapolis (7 million square feet) came next, with pipelines accounting for 2.5% and 2% of inventory, respectively. Chicago led in total square footage, with nearly 18 million square feet underway. 

Southern Markets: New Supply Moderates Dallas–Fort Worth Rent Growth 

Dallas–Fort Worth has consistently been a sought-after industrial market for several years, thanks to significant population growth, robust infrastructure access and its connections to Mexico, where manufacturing has experienced a surge due to a push for nearshoring. Over the past 12 months, rental rates in the Metroplex increased 6.8% to $5.67 per square foot, while the vacancy rate rested at 4.1%. 

However, unlike other booming markets, Dallas–Fort Worth has yet to experience double-digit rent growth, attributed to the impact of increased supply. The industrial supply surge in the metro began before the pandemic, with an impressive addition of 281 million square feet (30.7% increase) to the market's stock since 2014.  

South Regional Highlights 

Although industrial construction started to moderate, Dallas-Fort Worth continued to have the largest development pipeline in the South and the second-largest nationwide. As of October, the Metroplex had 42.4 million industrial space under construction, equal to 4.6% of existing stock. Charlotte had the next-largest pipeline in the South, with nearly 12 million square feet of space underway, accounting for 3.8% of the local inventory.  

At the other end of the spectrum, Baltimore had the smallest development pipeline among leading Southern markets, with 1.7 million square feet under construction. At the same time, Baltimore was the second-priciest market in the region, with lease rates at $7.69 per square foot, up 6.1% over year-ago figures.  

In terms of in-place rents, Baltimore was outpaced only by Miami, the only Southern market with double-digit asking rents and rent growth, coming in at $10.62 per square foot in October after a 10.3% year-over-year increase. Miami also saw the widest lease spread in the South, with new leases signed over the past 12 months costing $15.81 per square foot, $5.19 above in-place rents.  

Circling back to Dallas-Fort Worth, the Texas market recorded the largest sales volume in the South with $2.39 billion in closed industrial deals. Houston and Atlanta followed with $2.06 billion and $1.15 billion in transactions.  

Northeastern Markets: Supply Boom Slows in New Jersey 

Due to its proximity to ports, rail, highways and access to many of the country’s largest population centers, New Jersey has been a hot industrial market in recent years, delivering 37.8 million square feet (6.7% of stock) since the start of 2020. However, a significant slowdown is on the horizon. The market currently has only 1.3% of stock under construction, encompassing 7.3 million square feet. 

After breaking ground on a combined 25 million square feet in 2021 and 2022, developers in New Jersey have started construction on just 4.1 million square feet in 2023. While some of this is due to rising interest rates and tightening credit standards that have impacted the broader real estate market, New Jersey’s slowdown in new construction has been steeper than the nationwide drop in industrial starts. This likely indicates a decline in the available developable land for industrial assets. 

Northeast Regional Highlights 

Nonetheless, New Jersey remained one of the leading industrial markets in the Northeast, with in-place rents growing 8.7% year-over-year in October, reaching an average of $9.96 per square foot. New Jersey’s rate was slightly outpaced by Boston’s $9.98 per square foot, resulting from a 9% year-over-year increase in lease rates.  

However, tenants in New Jersey paid a higher premium for new leases signed ($13.91 per square foot) over the past 12 months, registering a spread of $3.95 per square foot. In Boston, new leases were signed at $12.66 per square foot, $2.68 more than in-place rents.  

Bridgeport, Conn., and Philadelphia registered rent increases more in line with the 7.6% national rate, rising 7.8% and 6.3%, respectively. In-place rents stood at $8.67 per square foot in Bridgeport and $7.48 per square foot in Philadelphia. Rates for new leases were also higher than in-place rents in both markets, with a spread of $2.31 per square foot in Bridgeport and $2.47 in Philadelphia. 

Across leading Northeastern markets, New Jersey recorded the largest sales volume year-to-date through October, totaling $2.24 billion. The market also claimed the region’s highest sale price, with properties trading at an average of $216 per square foot. In contrast, Bridgeport had the smallest sales volume at $500 million. 

Economic Indicators: Warehouse Employment Continues Slide 

Employment in the Warehousing and storage sector fell by more than 10,000 jobs in October, according to the Bureau of Labor Statistics. The sector has shed 78,200 workers, falling 4% year-over-year. In fact, employment in the sector has decreased for 12 straight months. 

One reason behind the decline in warehouse jobs may be Amazon’s pullback, which reportedly began when employment started falling in the sector. Amazon is the largest employer in this sector by far. After expanding rapidly for nearly two years, the online retailer slowed hiring and put millions of square feet up for sublease last year. 

Automation may be another factor behind falling levels of warehouse employment. As a tight labor market has made warehouse positions harder for e-commerce retailers and logistics providers to fill, many have looked to automate roles and processes to improve efficiency. 

Trends & Industry News: Electric Vehicles to Remain a Substantial Driver of U.S. Industrial Market 

The rise of electric vehicles (EVs) is spurring the need for industrial space nationwide. While the massive manufacturing facilities where EVs are assembled get most of the attention, EV production drives demand for millions of square feet of new industrial space through battery production and supplier networks for other parts and components. 

Although the International Energy Association expects electric vehicle sales in the U.S. to reach 1.5 million this year, an increase of 60% over 2022, which was up 55% over 2021, EV sales slowed down in the second half of 2023. In August, CNBC reported that the time it took to sell an EV in the U.S. was approximately twice as long as in the previous January.   

Moreover, despite the Inflation Reduction Act (IRA) that provides financial assistance to manufacturers, generating a rush of EV manufacturers building new facilities in the U.S., several automakers have announced plans to pull back on their electric vehicle plans.  

Ford has recently announced that the company will delay some of its planned multibillion-dollar investment in new EVs and battery production capacity due to "tremendous downward pressure" on prices. At the same time, General Motors has also withdrawn its 2023 results forecast and is reworking its EV strategy. The company is abandoning its goal of building 400,000 EVs through mid-2024.  

Nonetheless, while the recent pullbacks will likely cause some difficulties, the future of EVs remains positive. Additionally, research from The Federal Reserve Bank estimates that U.S. battery capacity will grow fivefold between 2021 and 2026.  

EV and battery manufacturing will also require extensive supplier networks occupying millions of square feet of industrial space. In North Carolina, India-based Epsilon Advanced Materials announced a $650 million plant in Brunswick County that will produce synthetic graphite anodes, a key component in EV batteries. Cnano Technology USA, a manufacturer of EV components, announced a $95 million facility in the Kansas City market. The interactions between materials and part providers with the manufacturers will also require additional logistics space. 

Our industrial property market outlook predicts that the production of EVs, their batteries and the supplier's networks will drive industrial demand in the foreseeable future. The IRA provides both the carrot and the stick to achieve the goal of half of all new vehicles sold being electric by 2030, and traditional automakers are investing billions to get a foothold in the EV market. 

Download the complete November 2023 report for a full picture of how U.S. industrial markets evolved in the first 10 months of the year, including insights on industry indicators 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