Industrial’s Very Normal Year

Article originally posted on Globe St. on June 30, 2023

After the hectic pace of growth in industrial supply that occurred in 2022, 2023 is shaping up to be a more normal year. In the first five months of 2023, developers began work on 109.6 million square feet of industrial space, compared to a record 240.5 million in the same period of 2022.

But this was to be expected given rising interest rates and the normalization of demand, according to CommercialEdge’s National Industrial Report for June 2023. Key industrial fundamentals remained healthy. Average in-place rents rose 11 cents from April to May to $7.29 per square foot, while new leases entered during the past year averaged $9.50 per square foot.

Markets around ports had the highest rent gains in May. In-place rents grew 17.1% in California’s Inland Empire, 12.8% in Los Angeles, and 9.2% in Orange County. On the east coast, rents rose 10% in New Jersey and 9.7% in Boston.

Port markets also demonstrated the greatest spreads between new leases and in-place rents, ranging from $8.10 more per square foot in the Inland Empire to $3.90 more in New Jersey.

The national industrial vacancy rate rose 4.3%, or 20 basis points, from April to May. The report attributes this to normalizing demand as well as record levels of new deliveries of space in recent quarters. Since the start of 2021, more than one billion square feet of industrial space has come on line – around 202 million of it in the first five months of 2023. In May, 618.9 million square feet was under construction, or 3.4% of all stock.

However, new construction starts have slowed sharply. Only 109.6 million square feet of new industrial space broke ground between January and May 2023, compared to 240.5 million in the same time frame in 2022 and 211.6 million in the same period in 2021.

While some of the new space will be absorbed, the report sees the prospect of rising vacancy ahead. Port areas are likely to be spared, but markets with low barriers to entry are at higher risk of oversupply.