Industrial Development Continues to Slow as Demand Normalizes

Key Takeaways: 

• National industrial in-place rents averaged $7.29 per square foot in May, up 7.4% year-over-year     
• The national vacancy rate stood at 4.3%, up 20 basis points month-over-month  
• Nationwide, 619 million square feet of industrial space was under construction  
• Industrial transactions totaled $16.3 billion at an average sale price of $134 per square foot 
• The Inland Empire claimed the largest sales volume nationwide, totaling $1.9 billion 
• Cincinnati registered the highest sale price in the Midwest, with properties trading at $166 per square foot 
• Dallas – Fort Worth led construction in the South, with nearly 54 million square feet underway 
• Boston and Bridgeport, Conn., set the widest lease spreads in the Northeast 

While new industrial supply reached record levels last year, 2023 is expected to be a more moderate year for deliveries. Between January and May 2023, 109.6 million square feet of new industrial space broke ground, significantly less than the 240.5 million that started during the same period last year, our latest U.S. industrial property market report reveals.  

The slowdown in development is no surprise amid the current high-interest-rate environment and the ongoing normalization of demand for industrial space. Phoenix and the Dallas – Fort Worth metroplex, however, were the outliers to this trend with 13.5 million square feet and 13 million square feet of new construction starts this year, respectively. In fact, the two markets accounted for nearly a quarter of all industrial space that has broken ground so far this year. 

As another sign that the ongoing construction slowdown is a normalization of market dynamics, key industrial fundamentals stayed healthy in May. Average industrial in-place rents increased 11 cents from April to May to reach $7.29 per square foot. At the same time, new leases inked in the past 12 months averaged $9.50 per square foot, $2.21 higher than in-place contracts. 

We expected to see a slowdown in construction starts in 2023. Given interest rates and the previous record-setting years, a pullback was inevitable. Underlying fundamentals remain encouraging as new leases signed continue to push higher, especially in the tightest markets.

Peter Kolaczynski, CommercialEdge Senior Manager   

Rents and Occupancy: New Deliveries Bring Uptick in Vacancies 

National in-place rents for industrial space averaged $7.29 per square foot in May, an increase of 11 cents from March and up 7.4% year-over-year. Port markets continued to have the largest rent gains in May, led by in-place rents growing 17.1% in the Inland Empire, 12.8% in Los Angles, 10% in New Jersey, 9.7% in Boston and 9.2% in Orange County.  

The May national industrial vacancy rate increased 20 basis points from the previous month to 4.3%. This uptick comes as the result of record levels of new deliveries in recent quarters paired with demand normalizing compared to the heights seen during the pandemic. 

Average Rent by Metro 

More than a billion square feet of industrial space has been delivered since the start of 2021, with around 200 million square feet coming online in the first five months of this year alone. While much of that space has been absorbed, some markets may see industrial vacancy rates rise in coming quarters. According to our industrial market outlook, markets with low barriers to entry for new development will face the most risk of oversupply, while port markets will continue to see low industrial vacancy rates.  

The average rate of new leases signed in the last 12 months rose to $9.50 per square foot through May, $2.31 more than the average for all leases. The largest spreads between in-place rents and new leases were found in port markets, such as the Inland Empire, where new leases cost $8.10 more per square foot. Other markets with notable lease spreads include Los Angeles ($6.45 more per square foot), Boston ($4.87), Orange County ($4.79), Bridgeport, Conn.($4.47) and New Jersey ($3.90).  

Supply: Development Continues to Moderate Across the U.S. 

Nationally, 618.9 million square feet of industrial space was under construction as of May, representing 3.4% of all stock. Meanwhile, developers delivered a total of 202 million square feet of industrial space so far this year. 

But due to rising interest rates and tightening credit standards, the rate of new construction starts has fallen in recent quarters. Through the first five months of 2021, 211.6 million square feet of industrial supply began construction, followed by 240.5 million through the first five months last year.  

Between January and May 2023, however, only 109.6 million square feet of new industrial space broke ground. While a lag in collecting some data means that this number will increase somewhat, there is a clear downward trend in industrial development. 

Construction: Completed & Forecasted 

Transactions: Sale Prices Remain Stable Despite Economic Challenges 

Nationwide, $16.3 billion of industrial transactions have been logged so far this year, our industrial market report reveals. Although the industrial sector remained an attractive asset class for investors, sales have fallen over the past year as interest rates rose and e-commerce growth slowed. Taking into account the higher cost of capital and tighter credit conditions, our industrial market outlook predicts that many owners will choose to hold their properties for the time being. 

While industrial sales volumes have fallen, prices have remained relatively stable, with the national average price per square foot sitting at $134 in the second quarter, down just 1.3% year-over-year. 

2023 Year-to-Date Sales (Millions) 

At the market level, Los Angeles recorded the second-largest sales volume, a growth that is not solely driven by logistics and nearby port activity. The metro’s industrial market is also benefiting from its established entertainment industry: The largest sale in Los Angeles so far this year is GI Partner’s $211 million purchase of 12800 Culver Blvd., a 185,000-square-foot property with data-storage and digital content distribution capabilities, as well as satellite arrays. 

Western Markets: The Inland Empire & Los Angeles Lead Rent Growth by Wide Margin 

Southern California continued to record strong fundamentals, with industrial rents rising 17.1% in the Inland Empire, 12.8% in Los Angeles and 9.2% in Orange County. The Inland Empire and Los Angeles, along with New Jersey's 10% rent growth, were the only markets to record double-digit rent increases among the nation's top industrial markets. The next largest gains in the West were recorded in Phoenix and Seattle, with rents increasing 8.3% and 7.6%, respectively, over year-ago figures. 

Top 5 Markets by Y-o-Y Rent Growth 

As of May, Western markets remained the priciest in the country: Orange County led with an average rent of $13.62 per square foot, followed by Los Angeles' $12.83 and the Bay Area's $12.23 per square foot. Central Valley continued as the most affordable market in the West, with in-place rents at $5.79 per square foot, below the $7.29 national figure. 

Additionally, Southern California markets continued to record the widest lease spreads. Specifically, new leases signed over the past 12 months cost $8.10 more per square foot in the Inland Empire, $6.45 more in Los Angeles and $4.79 more in Orange County. 

Phoenix remained the hottest market for industrial development in the U.S., with 58.4 million square feet of space underway, equal to 16.6% of the local inventory. To be precise, developers broke ground on some 13.5 million square feet of industrial space in the metro during the first five months of this year alone. Only Dallas recorded a similar pipeline, where developers have started works on 13 million square feet of space since the beginning of 2023. The next closest market pipeline stood at around 5.5 million square feet of starts over the same period. 

West Regional Highlights 

The Inland Empire had the second-largest supply pipeline in the West, with around 33.1 million square feet in development, accounting for 5.3% of its existing inventory. Orange County, with a 950,335-square-foot pipeline — representing 0.5% of existing stock — stood on the other end of the spectrum. 

Western markets also claimed the four largest sales volumes nationwide, with the Inland Empire and Los Angeles at the top with $1.9 billion and $1.1 billion in closed deals, respectively. The Bay Area and Phoenix followed with $1.08 billion and $836 million in industrial transactions. 

The West also recorded the top five highest average sale prices per square foot: Los Angeles came first, with properties trading at $417 per square foot, followed by the Bay Area's $379 per square foot. Next came Orange County's $323 per square foot, the Inland Empire’s $270 per square foot and Seattle's $231 per square foot rates. 

Midwestern Markets: Cincinnati Records Highest Sale Price in the Region  

Columbus registered the lowest industrial vacancy rate across the U.S., with a rate of just 1.7%. In the Midwest, Indianapolis was the second tightest industrial market, with only 2.7% of space available to lease. Despite low vacancy rates, rent growth was more sluggish in these markets compared to other low-vacancy regions, rising 4.1% in Columbus and 3.3% in Indianapolis, year-over-year in May. 

Overall, the most significant industrial rent growth in the Midwest was recorded in Detroit (up 4.4% year-over-year in May) and Cincinnati (up 4.3%). Detroit also had the highest in-place rents in May at $6.65 per square foot. At the same time, new leases signed in Detroit over the past 12 months cost $7.90 — $1.25 more per square foot. 

Midwest Regional Highlights 

Overall, Midwestern markets saw the narrowest spreads between new and in-place leases, with new leases in Kansas City and St. Louis costing slightly less than their respective overall market averages. 

On a percentage-of-stock basis, Columbus had the largest development pipeline among Midwestern markets, with the equivalent of 4.1% of its total stock underway, followed by Indianapolis, with 3.6% of inventory under construction. In terms of square footage, Chicago led with 23.3 million square feet of space under development. 

Through the first five months of the year, investors closed around $1.94 billion in industrial deals across the Midwest's top markets. Chicago recorded the largest sales volume, a total of $506 million, with properties trading at $78 per square foot. The Twin Cities came in second with $315 million in industrial deals, closed at $91 per square foot. 

The highest sale price, however, was recorded in Cincinnati, where properties traded at $166 per square foot, higher than the $134 per square foot national average. Cincinnati was also the only Midwestern market with an average sale price north of $100 per square foot. 

Southern Markets: Dallas Still a Hot Market for Development 

Among leading Southern markets, Atlanta and Nashville recorded the lowest vacancy rates in May, both at 2.7%. Charlotte followed with 3.1% of its space available for lease. Conversely, Houston had the highest vacancy rate nationwide at 9.1%. 

At the same time, Houston underwent one of the slowest industrial rent growths in the region, rising just 2.9% year-over-year in May. Only Charlotte recorded a smaller uptick in the South, with rents increasing 2.6% over the same period. Miami again led rent growth in the region at 8.1%, followed by Atlanta's 7.3% and Dallas – Fort Worth's 7% rate. 

South Regional Highlights 

Although Southern markets had more modest lease spreads, Miami stood out: While in-place rents averaged $10.16 per square foot here, new leases signed over the past 12 months averaged $13.62. Similarly, Nashville's in-place rents stood at an average of $5.60 per square foot, whereas new contracts signed at $8.56 per square foot. 

The Dallas – Fort Worth Metroplex led construction in the South, with 53.8 million square feet of industrial space under construction as of May, accounting for 6% of its total stock. Considering projects in the planning phases, the metroplex's industrial supply could increase by as much as 11.6%. 

Meanwhile, Houston led the South in sales with a total volume of $601 million closed at an average price of $123 per square foot, the region’s highest. Dallas – Fort Worth followed, where transactions amounted to $590 million, for an average of $108 per square foot, tying Atlanta for the third-highest price per square foot in the region. Tampa's $117 per square foot average was the second-highest price per square foot in the South.  

Northeastern Markets: New Jersey Remains Region’s Sales Volume and Sales Price Leader 

New Jersey remained the leading industrial market in the Northeast, with its vacancy rate at 3.1%. Additionally, May in-place rents were up 10% year-over-year in New Jersey reaching an average of $9.66 per square foot. Nationally, New Jersey's rent growth was outpaced only by Los Angeles' 12.8% and the Inland Empire's 17.1%.  

Boston and Bridgeport, Conn., also registered substantial industrial rent increases at 9.7% and 8.4%, respectively. Rates for new leases were also higher than in-place rents in both markets, with a spread of $4.87 per square foot in Boston and $4.47 in Bridgeport. 

Northeast Regional Highlights 

Across leading Northeastern markets, New Jersey recorded the largest sales volume year-to-date through May, totaling $684 million. The market also claimed the region’s highest sale price, with properties trading at an average of $217 per square foot. In contrast, Bridgeport had the smallest sales volume at $199 million. 

Philadelphia led the Northeast in terms of new supply, with some 18.4 million square feet of industrial space in the pipeline, representing 4.4% of total stock. Meanwhile, Boston had around 5.7 million square feet, or 2.4% of its stock, underway, and New Jersey had roughly 11.3 million square feet or 2% of the local stock under construction. 

Economic Indicators: E-Commerce Saw Notable Uptick in the First Quarter 

In the first quarter of 2023, e-commerce sales totaled $272.6 billion, up 3% over the previous quarter, according to the Census Bureau. This was the largest quarterly increase since the fourth quarter of 2021. At the same time, e-commerce’s share of core retail sales (which excludes food, automobile and gasoline) grew from 17.9% to 18.2% over the same period. 

This was the first time since the second quarter of 2021 that e-commerce’s share of core retail sales surpassed 18%. Following the spike at the start of the pandemic, the share of e-commerce hovered under that 18% mark for several quarters. 

E-Commerce as % of Total Commerce 

Although this bump in both the sales volume of e-commerce and its share of core retail sales might not indicate a long-term trend, it is notable for a sector that ran hot in 2020 and 2021 but has cooled thereafter. It will be worth paying close attention to the subsequent quarter’s data to see if this was a blip or if the share of e-commerce will steadily climb again, like it did throughout the last decade. 

Trends & Industry News: Firms Look to Mexico for Nearshoring 

As firms look for ways to reduce risk by adding redundancy, resilience and diversification to their supply chains, nearshoring to Mexico has emerged as a solution for many companies. 

China’s zero-Covid policy — which would periodically shut down part of the country — helped fuel problems in shipping backlogs and supply chain bottlenecks that persisted into 2021 and 2022. But nearshoring is not solely a response to problems caused by COVID-19 but also comes as a response to the years of mounting tensions between the U.S. and China, tariffs imposed by the Trump administration, and the simple need to get products faster. 

Nearshoring of manufacturing and the creation of supply chains to Mexico has been ongoing for some time already, and Mexico — not China — is the most active importer to the U.S. this year. Through the end of April, more than $153 billion in goods have been imported from Mexico, while China has imported the third most goods ($133 billion) into the U.S. behind Canada ($139 billion). Last year, imports from China totaled $536 billion, from Mexico $455 billion and from Canada $437 billion. While Canada is also a nearshoring partner for U.S. firms, multinational corporations have preferred Mexico due to cheaper labor, abundance of land and proximity to major U.S. population centers. 

According to data from the Bureau of Transportation Statistics, the Laredo, Texas border gateway is the busiest for goods shipments. In 2021, Laredo accounted for 37% of truck container border crossings and 46% of rail containers. The movement of goods through this border port and other entries scattered along southeastern Texas has driven demand for industrial space along the central Texas corridor that runs through San Antonio, Austin and Dallas. El Paso, across the border from Juarez, has also seen a spike in industrial demand due to nearshoring. The under-construction supply in these markets represents more than 10% of their respective stocks and includes multiple large logistic parks and a 2.2 million square foot distribution center for TJ Maxx. 

Our industrial market outlook predicts the nearshoring movement to continue as firms look for ways to mitigate the fragility of supply chains that was exposed during the last few years. Auto manufacturing, for example, has long claimed a major share of Mexican exports: It is estimated that nine out of f every ten cars built in Mexico are exported and many cars assembled in the U.S. rely on parts made in Mexico. But manufacturing in Northern Mexico is expected to become more diverse in the coming years.

Download the complete June 2023 report for a full picture of how U.S. industrial markets fared in the first five months of the year, including insights on industry 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.