Industrial Rent Growth Will Temper to Historical Averages Next Year

Article originally posted on Globe St. on December 18, 2023

Industrial and logistics rent growth has tempered a bit from its unprecedented high rate of the past 24 months, according to Colliers, which expects 2024 to see rates fall in line with the historical averages of between 3% and 8%.

With supply increasing while demand slows, rent growth should continue to slow throughout 2024 but remain the strongest asset class for rent growth, Ryan Severino Chief Economist and Head of US Research at BGO, tells GlobeSt.com.

“As industrial transitions from a ‘box to store to other boxes’ to a sophisticated, technologically oriented part of the integrated global supply chain, its value to the economy is increasing,” Severino said. “That is supporting the structural increase in real rent levels.”

On a market level, structural factors are upending conventional wisdom on rents.

“The surge in nearshoring/onshoring/friendshoring and the related capital investments are disrupting normal production and distribution patterns,” he said.

Relatedly, the first major railroad merger in more than two decades will more directly link trade flows between the US, Canada, and Mexico.

“Both changes are reorienting trade and supply chains and supporting robust rent growth in some non-traditional markets as the industrial sector continues to evolve,” Severino said.

Some Say, Rents on the Decline

Some experts believe that industrial rents are now on the decline. One is Burton Young, President of Sperry Equities, who tells GlobeSt.com occupancies are holding but are expected to slide during the next 12 to 18 months.

“The economy appears to be slowing but the key indicators are all over the board, so nothing is certain for 2024. Companies are being cautiously optimistic and seem to be in a wait-and-see mode before committing big dollars to expansion.

“If the country avoids a recession in the first and second quarters of next year, the Fed will start lowering rates and things should heat up again for the industrial community and the economy overall.”

While it is clear that the amount of supply delivered will exceed new demand over the next six to nine months resulting in generally limited rent growth in 2024, Robert McCall, Partner and Head of U.S. Industrial and Brazil Acquisitions at GTIS Partners, tells GlobeSt.com that infill, supply-constrained locations attracting tenants between 50,000 sf and 150,000 sf have the potential to outperform the base case and experience real rent growth.

“For 2025, the supply-demand imbalance should stabilize resulting in real rent growth in most industrial markets around the country as new construction starts have dropped dramatically compared to the past few years,” he said.

Further Out on the Horizon

On a positive note, velocity is still higher than pre-COVID and activity continues to be robust, Lee Brodsky, CEO of BEB Capital, tells GlobeSt.com.

However, iBorrow Managing Partner Brian Good says his firm is counseling borrowers to be proactive in communicating if they encounter headwinds in the sector.

“Even when rents are climbing, other fundamentals can still deteriorate, and we want to be able to work with borrowers to help them execute their business plans at the first sign of difficulty,” he tells GlobeSt.com.