Industrial real estate cooling, but record low vacancy persists

As demand moderated and speculative construction completions persisted at a healthy rate, the industrial vacancy rate ticked slightly higher to 3.6 percent according to Cushman & Wakefield’s first quarter industrial report for 2023.

While the rate has risen each of the last two quarters, the market remains historically low – 70 basis points (bps) below the five-year quarterly average and 170 bps lower than the 10-year average – with many markets still yielding sub 3.0 percent vacancy rates.

The under-construction pipeline continued to decline modestly (down 3.0 percent since year-end 2022) as completions outpaced construction starts. Construction starts are anticipated to further slow as the year progresses under the current economic climate. Of the 663.3 million square feet (msf) of industrial product under development, 84 percent is on a speculative basis and almost 20 percent has been pre-leased by tenants.

Overall net absorption started the year with 62.5 msf of positive demand, a drop of 48.5 percent compared to Q1 2022. While absorption has tapered off significantly compared to the past couple years, as anticipated by the Cushman & Wakefield’s forecast, it is showing a normalization of market conditions at more sustainable demand levels.

When compared to pre-pandemic years like 2019, the first quarter numbers are right on track. And when compared to the pre-pandemic 10-year average (2010-2019) of 56.8 msf, the start of the year looks positive.

Leasing solid

Leasing is off to a solid start with 62.5 msf of positive net absorption, a level of growth on par with the pre-pandemic Q1 trend and well above the pre-pandemic 10-year average (2010-2019) of 56.8 msf for quarterly net occupancy gains. Demand is normalizing to more sustained levels of growth, as anticipated by the Cushman & Wakefield Research March 2023 U.S. Macro Outlook report, which forecasts more than 580 msf of net absorption over the next three years.

“Given the voracious pace of growth the past two years and some timidity tied to a more uncertain economic outlook, deals are taking a bit longer to get done, but they are getting done and I remain upbeat on the outlook,” said Jason Tolliver, executive managing director and co-lead of Americas logistics and industrial services at Cushman & Wakefield.

“We continue to see a diverse mix of tenants in the market seeking space and that bodes well for future leasing activity. I think we’ll see a more normalized market than the frenzied pace of the past 24 months with industrial demand shifting back to more sustainable levels as the market powers forward,” he added.

Rent growth trended to new heights, climbing another 3.5 percent since Q4 2022 and has swelled 17.2 percent from one year ago. The northeast has led rental rate growth over the last year, increasing by 22.4 percent in that time.

However, deal volume remained healthy with 136.9 msf of new deals signed, on par with the pre-pandemic totals registered earlier in the expansion cycle. Tenants demand for new construction remained robust as 46.4 percent of the transactional volume recorded in Q1 occurred within facilities built since 2020.

Quarterly completions remained healthy despite falling by 12.2 percent quarter-over-quarter. Compared to one year ago, they are up 40.1 percent and Q1 was the second highest total for completions on record. The southern region continued to account for the majority of deliveries with just over 59.2 msf of new product completed throughout the quarter.

“Right now, leasing is comparable to where we were in 2019, which was a great year for industrial real estate. In fact, 2023 has seen more activity leasing activity in the 250,000 sf+ range, showing significant demand for larger space than in 2019 in terms of both deal volume and deal count,” said Carolyn Salzer, Americas head of logistics and industrial research.