Vacancies are down and average rents are up. Just more evidence that industrial real estate remains the most resilient commercial sector in the United States.
According to the August national industrial report from CommercialEdge, industrial in-place rents averaged $7.39 a square foot in July. CommercialEdge reports that this is up 7.5% from a year earlier.
At the same time, the national vacancy rate for the U.S. industrial sector fell to 4.4%. That’s down 10 basis points on a month-over-month basis.
This is notable in part because of how hard the country’s higher interest rates have hit so much of the rest of commercial real estate’s asset types.
The Federal Reserve’s fight against inflation has led to multiple interest rate hikes during the last 18 months. The industrial sector has remained resilient to these hikes when it comes to vacancies and rents.
However, this doesn’t mean that higher rates haven’t had some negative impact. CommercialEdge reports that as capital has become harder to find and more expensive, industrial construction starts and sales have slowed.
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. Add the increased cost of construction financing, and many developers are pausing projects.
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.
Given strong rent growth and low vacancies, owners are comfortable holding properties. 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.
Some Midwest industrial markets are performing especially well. In Nashville, the vacancy rate stood at 2% in July, where the average rent was $5.59 a square foot, up 6.6% from the previous year.
In Detroit, the vacancy rate was 3.4% in July while average rents jumped 5.5% to $6.76 a square foot. In Columbus, the average rent increased 4.7% year-over-year while hitting $4.43 a square foot. The vacancy rate here was a low 3.1%.
The Minneapolis-St. Paul industrial sector was strong, too, with the vacancy rate at 6.2% and average rents jumping 4.3% from last year to $6.53 in July.
Cincinnati saw an average rent of $4.64 a square foot, up 4.3% from a year earlier, and a vacancy rate of 4.6%. In Memphis, the vacancy rate was 5.4% in July and average rents were up 4% to $3.67 a square foot.
How are industrial sales holding up throughout the Midwest? These are down, thanks, of course, to higher interest rates. This doesn’t mean, though, that sales aren’t happening.
The Chicago market, for instance, saw $983 million in industrial sales in 2023 up through July. The Twin Cities area ranked second in the Midwest with $551 million worth of industrial sales.
In Cincinnati, that figure stood at $508 million, while it sat at $380 million in Detroit and $336 million in Columbus.
