2023 Marks Year of Shifts and Stabilizing Trends in U.S. Industrial Sector

Key Takeaways: 

• National industrial in-place rents averaged $7.60 per square foot in November, up 7.7% year-over-year 
• The national vacancy rate stood at 4.6%, unchanged month-over-month   
• In November, 505 million square feet of industrial space was under construction nationwide 
• Industrial transactions totaled $48.6 billion at an average sale price of $130 per square foot  
• Western markets continued to post the widest lease spreads, with the Inland Empire registering a spread of $9.77 per square foot  
• Chicago sales volume amounted to $1.97 billion, the largest in the Midwest 
• Dallas continued to boast the largest development pipeline in the South, with 41.4 million square feet underway 
• New Jersey logged the largest sales volume in the Northeast, closing $2.53 billion at $215 per square foot

Trends & Industry News: Trends That Shaped the Industrial Sector in 2023 

The year 2023 has brought on several challenges and changes in the industrial sector. Port activity returned to normal, manufacturing surged in North America, and interest rate hikes dampened transaction activity and new development, as highlighted by our monthly U.S. industrial market reports. 

The strains on ports caused by the pandemic continued to ease over this past year, with activity returning to levels seen before the health crisis. For example, the Ports of Los Angeles and Long Beach handled 17% fewer containers through October 2023 than they had through the same period last year.  

While there are many reasons for this, one of the most significant has been the subdued demand for goods. Consumer preferences rotated towards services once the pandemic ended, while inflation has eaten away at consumers’ discretionary income.  

As our often-cited call of ‘normalization’ came to fruition for 2023, we are watching the absorption of new product and the rent growth of expired leases heading into 2024. While the outlook remains positive, a meaningful drop in lease spread or the inability to lease up new deliveries would begin to elicit more concerns.

Peter Kolaczynski, Director, CommercialEdge

The other factor behind normalizing port activity this year is the nearshoring and reshoring of manufacturing. As manufacturers look to avoid the kind of disruptions seen in 2020 and 2021, they have increasingly looked to move operations to North America.  

In this regard, 2023 seems to be a significant turning point in U.S. trade, with Mexico surpassing China as the country’s number-one trade partner. In October, 15.5% of export volume was from Mexico, while 15% was from China, according to the Census Bureau. Meanwhile, within the U.S., the production of electric vehicles and their batteries has led to dozens of large manufacturing facilities breaking ground throughout the Midwest and Southeast.  

Furthermore, interest rate hikes continued in 2023, putting downward pressure on transaction volumes and new development, which had record-setting years in 2021 and 2022. Year-to-date through November, investors closed $48.6 billion in industrial sales nationwide, well below the $129 billion logged in 2021 and $101.2 billion in 2022. Despite the downturn in sales volume, the average sale price of an industrial property had a modest increase of 6% in 2023, moving from $123 per square foot in 2022 to $130 this year. 

This year has also been a year of heavy deliveries for the industrial sector, with more than 508 million square feet of space coming online through the end of November, already the most for a calendar year tracked by our database. With a month left in the year and a lag in collecting some data, this year will far surpass the previous record of 506 million square feet of new deliveries set last year.  

Construction: Completed & Forecasted

However, the new supply wave will crest soon, as starts have fallen precipitously in 2023. A total of 282.4 million square feet of projects have started this year after 598 million square feet began construction in 2022. Overall, starts have slowed as the year went on, and interest rates continued to rise. The third quarter saw 66.2 million square feet of starts after 93.1 million square feet broke ground in the second quarter and 100.6 million in the first quarter.  

Rents and Occupancy: New Supply Pushes Up Vacancy Rates 

National in-place rents for industrial space averaged $7.60 per square foot in November, an increase of four cents from October and up 7.7% year-over-year. The average rate for new leases signed in the last 12 months rose to $10.26 per square foot, $2.66 more than the average for all leases, according to our latest U.S. industrial market report. 

Southern California continued to outpace the rest of the country for in-place rent growth, having the only three markets where rents grew by double digits in the last 12 months. Rents increased 15.2% in the Inland Empire, 12.7% in Los Angeles and 11.6% in Orange County. 

Average Rent by Metro 

Coastal markets also had the largest spread between in-place rents and new leases. A new lease signed in the last 12 months in the Inland Empire cost $9.77 more per square foot than the market average. Other markets with substantial lease spreads include Los Angeles ($6.46 per square foot), Miami ($5.56 per square foot) and New Jersey ($4.15), to name a few. 

At the same time, the national industrial vacancy rate was 4.6% in November, unchanged from the previous month. After sitting near 4% during the first half of the year, the national vacancy rate ticked up in the second half of 2023, partly due to normalizing demand and partly to record levels of new supply being delivered. 

Supply: Slowdown Hits Even the Hottest Markets 

Nationally, 505.2 million square feet of industrial space were under construction as of November, accounting for 2.7% of existing inventory, our U.S. industrial market report shows. However, industrial starts have fallen by nearly half this year due to the increased cost of financing and falling demand for new space.  

Amidst the slowdown, Dallas and Phoenix continued to lead the nation in new industrial development. The two markets combined accounted for more than 17% of all starts nationwide, with Dallas seeing 26 million square feet of starts and Phoenix 22.6 million. Yet even starts in these markets are way down from last year, when 49 million square feet broke ground in Dallas and 41.3 million in Phoenix.  

National Industrial Supply Pipeline Trend  (Million Sq. Ft.)

Transactions: The Average Sale Price Holds Steady Despite Slowdown in Volume 

Across the U.S., a total of $48.6 billion in industrial sales has been recorded through the end of November, with properties trading at $130 per square foot, according to our industrial property market report. 

In 18 of the top 30 markets, the sales volume is less than half of what it was during the same period last year. Only one major market, the Bay Area, has seen more sales in 2023, with its sales volume totaling $2.33 billion, well above the $1.9 billion recorded last year. 

Despite volume falling, average sale prices are holding up in many markets. In 12 of the top 30 markets, the average price per square foot in 2023 has increased from 2022. In 11 other markets, prices have decreased by less than 10 percent. Denver, the market with the biggest drop in average sale prices, has seen a 24% decline in 2023. 

2023 Year-to-Date Sales (Millions) 

In Atlanta, volume has fallen 56%, while sales prices have slipped 7%, despite being a hot industrial market in recent years, seeing robust demand from tenants and investors alike. Nonetheless, the market has recorded some notable sales this year. For example, Stockbridge recently sold a 585,637-square-foot outdoor distribution facility in Gwinnett County for $40 million. Additionally, Atlanta was a key market in Prologis’ $3.1 billion portfolio acquisition from Blackstone’s Link Logistics. 

Western Markets: Southern California Becomes Only Region with Double-Digit Rent Growth 

In 2023, Southern California markets have faced an increase in vacancy rates due to a combination of factors, including record deliveries since the start of the pandemic, a decline in import volumes and a return to normal demand for industrial space. 

For instance, the Inland Empire witnessed a significant jump in vacancy rates, rising from below 2% at the beginning of the year to 4.9% in November. Similarly, Orange County and Los Angeles have also seen an uptick in available space, with vacancy rates reaching 4.7% in Orange County and 6.3% in Los Angeles. 

West Regional Highlights  

Despite the surge in industrial vacancy rates, Southern California market fundamentals remained positive with rents rising 15.2% in the Inland Empire, 12.7% in Los Angeles and 11.6% in Orange County year-over-year in November — the only markets with double-digit rent growth across the U.S.  

Outside Southern California, Seattle and Portland recorded the next-largest growth in asking rents, rising 9% in Seattle and 8.1% in Portland. In contrast, Denver saw the slowest growth, with asking rents increasing just 4.3% year-over-year in November. 

As a result, Western markets also remained the most expensive in the U.S.: Orange County led with an average rent of $14.58 per square foot, followed by Los Angeles’ $13.69 per square foot, the Bay Area’s $12.83 per square foot and Seattle’s $10.66 per square foot. Central Valley ($6.03) was the only region in the West to see in-place rents below the national figure of $7.60 per square foot.  

Western markets also recorded some of the widest lease spreads nationwide. In the Inland Empire, new contracts signed at $19.25 per square foot — $9.77 more than in-place rents. Los Angeles and the Bay Area also recorded hefty premiums, with new leases signed over the past 12 months costing $6.46 and $5.73 more than in-place rents, respectively.  

Phoenix remained the number one market for development, with 47.7 million square feet of industrial space under construction, accounting for 12.6% of existing stock. Although the market continues to be an up-and-coming manufacturing hub, 78% of the projects that broke ground this year were logistics or distribution space. Overall, manufacturing facilities in Phoenix make up 27% of all projects underway, with only 2.5 million square feet having broken ground this year. 

Year-to-date Sale Price Per Square Foot 

Looking at transactions, Los Angeles and the Inland Empire remained the hottest markets in the nation year-to-date through November, closing $3.89 billion and $3.86 billion in sales, respectively. Among Western markets, the Bay Area and Phoenix recorded the next-largest volumes, with industrial deals amounting to $2.33 billion and $2.01 billion, respectively. 

In terms of sale prices, the Western region secured the top four spots for the highest average price per square foot. Leading the pack was the Bay Area, commanding a price of $336 per square foot, followed by Los Angeles at $315 per square foot, Orange County at $309 per square foot and the Inland Empire at $250 per square foot. 

Midwestern Markets: Rent Growth Lags National Trends in the Region 

The most active logistics markets in the Midwest boasted some of the nation's lowest industrial vacancy rates, with Columbus at 1.6% and Indianapolis at 3.2%. Despite outperforming even the hottest markets in the West and Northeast in terms of vacancies, the leading industrial markets in the Midwest still ranked among the slowest in the U.S. 

To begin with, rent growth in the Midwest has been notably sluggish. Even in low-vacancy markets like Columbus and Indianapolis, year-over-year increases fell below the national rate of 7.7% in November. Specifically, Columbus experienced a 6.2% rent increase, followed by Indianapolis with a 5.6% growth. The lowest growth rates in the region was recorded in Chicago and Detroit, inching up by 3.7% and 3.6%, respectively. 

Midwest Regional Highlights 

With slow rent growth across the board, asking rents also remained among the lowest in the Midwest. In November, the Twin Cities posted the highest lease rate in the region at $6.67 per square foot, followed closely by Detroit, with in-place rents at $6.66 per square foot. The most affordable industrial market in the region was Indianapolis, with in-place rents at $4.53 per square foot. Among the 30 leading industrial markets, Memphis was the only metro with lower rents, at $3.84 per square foot.  

On a percentage-of-stock basis, Kansas City had the largest development pipeline among Midwestern markets, with the equivalent of 3.6% of its total stock underway, followed by Indianapolis, with 2.1% of inventory under construction. In terms of square footage, Chicago led with more than 17 million square feet of space under development, our industrial property market report shows. 

Year-to-date through November, investors closed around $5.64 billion in industrial deals across the top Midwestern markets. Chicago remained the leader in sales volume, with $1.97 billion in transactions, with properties trading at $89 per square foot. The Twin Cities came in second with $917 million in sales, closed at $96 per square foot. 

Cincinnati and Indianapolis recorded the highest sale prices, with properties trading at $101 per square foot. This, however, is notably lower than the national average of $130 per square foot. In general, the Midwest registered some of the lowest sale prices year-to-date, with Detroit at $73 per square foot, Columbus at $79 per square foot and Kansas City at $82 per square foot, representing the three lowest sale prices among the leading industrial markets. 

Southern Markets: Dallas-Fort Worth Leads the South in Development, Sale Volume 

Among the top Southern markets, Nashville and Charlotte had the lowest vacancy rates in November, at 2.4% and 3%, respectively. Atlanta followed with 3.6% of its space available for lease. In contrast, Tampa had the highest vacancy rate in the region at 6.7%.  

At the same time, Tampa experienced one of the slowest industrial rent growths in the South, up 4.6% year-over-year in November. Only Houston recorded a smaller uptick in the region, with rents rising 4.1% — this was also the third-slowest growth rate nationwide. On the other hand, Miami saw the largest gains, with rates increasing 9.3%, followed by Nashville’s 7.3% and Atlanta’s 7.2% rate.  

While Southern markets generally had more modest lease spreads, Miami was particularly noteworthy. The average in-place rent in Miami was $10.46 per square foot, but new leases signed over the past 12 months averaged $16.02 per square foot. Similarly, in Atlanta, the average in-place rent was $5.51 per square foot, while new contracts were signed at $8.34 per square foot. 

South Regional Highlights 

Dallas-Fort Worth had the largest development pipeline in the region and the second-largest nationwide, with 41.4 million square feet of industrial space under construction, equal to 4.5% of existing stock. The Metroplex continued to be the epicenter of industrial construction starts in the U.S., with 26 million square feet of projects breaking ground in 2023. What is more, around 90% of the projects that kickstarted this year were logistics and distribution facilities.  

Dallas-Fort Worth also recorded the largest sales volume in the South year-to-date through November, with investors closing $2.86 billion in industrial deals. Houston followed, with transactions totaling $2.31 billion during the same period. Atlanta logged the third-largest volume, totaling $1.27 billion. 

In terms of sale prices, the Texas metros also claimed the leading positions, with Houston recording the highest price at $130 per square foot, followed by Dallas at $129 per square foot. Nashville logged the third-highest sale price at $127 per square foot.  

Northeastern Markets: New Jersey Remains Hot Market Despite Rise in Vacancies 

Similar to Southern California markets, vacancy rates in the Northeast have ticked up in November compared to the beginning of the year. For example, in January, New Jersey had 2.8% of its industrial space available for lease, whereas the market’s vacancy rate stood at 5.1% in November.  

Despite the uptick in vacancies, New Jersey remained one of the strongest industrial markets in the nation, with in-place rents growing 9.1% year-over-year to $10.06 per square foot. At the same time, new lease premiums reached $4.15 per square foot — the widest lease spread in the Northeast.  

Boston followed New Jersey closely in rent growth, rising 9% year-over-year in November to $10.02 per square foot. At the same time, Bridgeport’s and Philadelphia’s rent increases were more in line with the national average, up 7.8% and 6.2%, respectively. Rates for new leases were also higher than in-place rents in all markets, with a spread of $1.30 per square foot in Boston, $1.92 in Bridgeport and $2.49 in Philadelphia. 

Northeast Regional Highlights 

Across leading Northeastern industrial markets, investors closed roughly $4.52 billion in transactions year-to-date through November. New Jersey topped the list with $2.53 billion in sales at a price per square foot of $215 — also the highest in the region. Boston and Philadelphia followed with transaction volumes of $739 million and $736 million, respectively. Boston's average sale price was $150 per square foot, while Philadelphia's averaged $113 per square foot. Meanwhile, Bridgeport recorded $512 million in sales at a lower rate of $88 per square foot. 

Philadelphia led the Northeast in terms of new supply, with 10.8 million square feet of industrial space under construction, accounting for 2.5% of total stock. Meanwhile, New Jersey had 8.5 million square feet or 1.5% of its stock underway, and Bridgeport had 3.1 million square feet under development, also accounting for 1.5% of the local stock. Finally, Boston’s 2.1 million-square-foot pipeline represented 0.9% of the market’s existing inventory.  

Economic Indicators: Holiday Sales Growth Expected to Slow Compared to Last Year 

E-commerce sales totaled $284.1 billion in the third quarter, according to the Census Bureau, increasing 2.3% over the previous quarter. 

E-commerce’s share of core retail sales (which excludes gasoline, automobiles and their parts) increased slightly, from 18.4% to 18.5%. Black Friday and Cyber Monday sales will likely boost e-commerce figures when the fourth quarter data becomes available next year. 

E-Commerce Volume

Inflation has eaten away at incomes for the last two years, and while price increases have moderated in recent months, the impact is still being felt. Real incomes remain below pre-pandemic levels, and spending growth has lagged behind GDP growth for four of the last five quarters. 

These factors have led many retailers to temper expectations for the holiday season. The National Retail Federation predicted that holiday sales will increase by three to four percent this year, slower growth than seen in 2021 and 2022. Despite this, core retail sales were up 0.6% in November. 

Download the complete December 2023 report for a full picture of how U.S. industrial markets evolved in the first 11 months of the year, including insights on industry indicators and economic recovery fundamentals. 

You can also see our previous industrial reports.

Methodology

The monthly CommercialEdge national industrial real estate report considers data recorded throughout the course of 12 months and tracks top U.S. industrial markets with a focus on average rents; vacancies (including subleases but excluding owner-occupied properties); deals closed; pipeline yield; forecasts; and the economic indicators most relevant to the performance of the industrial sector.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Average Rents —Provided by Yardi Market Expert, a cutting-edge service that uses anonymized and aggregated data from other Yardi platforms to provide the most accurate rental and expense information available.
• Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of industrial space in that market. Owner-occupied buildings are not included in vacancy calculations.

Stage of the supply pipeline:

• Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.
• Under Construction — Buildings for which construction and excavation has begun.

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.   

Market boundaries in the CommercialEdge industrial report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources.