An evolving market. That’s what industrial brokers face today. Tenants are looking for smaller industrial buildings. And buyers? They’re quiet today, waiting for the Federal Reserve Board to stop boosting interest rates before they invest in even the typically hot industrial sector.
It’s combined to bring uncertainty to an industrial sector that had been sizzling hot for years.
Just ask Billy Powers, associate vice president at the Indianapolis office of Colliers. He said that while interest rates haven’t slowed the demand users have for industrial space, the mix of space that tenants are looking for has changed.
Powers says that last year, tenants were looking for industrial spaces of 50,000 square feet up to 1 million square feet. Today, tenants in the Indianapolis market are most interested in 50,000- to 200,000-square-foot industrial facilities.
“It’s difficult to pinpoint why this has changed,” Powers said. “A lot of the Fortune 100 companies are taking a deeper look into their supply chains. Two years ago they were more aggressive in taking space to help move their product quickly. Now they are more strategic about the space they need. There is still interest in industrial space, but there aren’t as many of those deals for larger spaces that we saw during the last year or two.”
Powers said that tenant demand has been spread out among Indianapolis’ submarkets, though some of these markets do have higher vacancy rates. He pointed to the Mount Comfort submarket. This submarket, just east of Indianapolis, has a higher industrial vacancy rate because it has four vacant buildings, each about 1 million square feet, with vacancies.
But areas such as Indianapolis’ Northeast corridor have lower vacancy rates. This submarket in particular is targeting life sciences users, Powers said. Because of this, the industrial spaces developed in this submarket tend to be smaller, resulting in spaces that are more easily filled and lowering the submarket’s overall vacancy rate.
“It is tough for tenants to find industrial space in the smaller square footages,” Powers said. “Companies have to move quickly to get that space. We’ve also seen a huge increase in industrial rents during the past year. That has a much larger impact on companies that are looking for smaller spaces. If you are looking for 20,000 square feet but rent is 25% higher than it was a year ago? That makes the market for smaller users very competitive.”
And when it comes to industrial sales? Powers said that many investors are taking a wait-and-see approach before committing their dollars to commercial real estate.
“The capital markets have slowed dramatically,” Powers said. “But we remain a very strong market for multifamily and industrial, life sciences. We are seeing a lot of inquiries but not a lot of transactions. Money is on the sideline ready to be deployed once it makes sense for people. A lot of investors are waiting to see what happens in the next few years when all the commercial real estate debt comes due for repayment at the end of 2025.”
Powers said that the greatest amount of sales activity has focused on value-add industrial projects. But investors have dramatically slowed the amount of money they are pouring into big-distribution centers.
