Economic uncertainty? It’s hit the industrial sector, too, according to the latest research from CommercialEdge.
The industrial sector continued its momentum through April, despite uncertainties in the macroeconomic environment such as maturing loans, tightening loan underwriting and a slowdown in import volumes, according to the latest U.S. industrial market report from CommercialEdge.
In its May National Industrial Report, CommercialEdge reported that average industrial in-place rents increased three cents from March to April to reach $7.18 a 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.
The national in-place rent for industrial space averaged $7.18 a 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.
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, Ohio, (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.
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. 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 facilities. Amazon remains the biggest industrial user and continues to expand, while growth is slowing to a more cautious pace.
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 CommercialEdge.
In the first four months of the year, a total of 162.4 million square feet of industrial space was 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.
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 and 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.
Nationally, $12.6 billion in industrial transactions were closed during the first four months of the year, according to CommercialEdge.
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%, but noticeably lower than 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.
Columbus remained the tightest industrial market in the U.S., with only 1.7% of space available for lease. Indianapolis remained the next tightest market in the region, with its vacancy rate 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, while 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.
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.