Industrial Real Estate
Industrial real estate has become a powerful and transformational part of the CRE market, providing investors with excellent returns. This increased importance is due to e-commerce, changing consumer habits, and tech advancement. According to the latest Commercial Edge U.S. Industrial market report, although other CRE sectors have some reservations, the industrial segment has kept up performance. However, deal volume for the industrial sector has started to fall as market liquidity has been challenging. This retreat in the industrial sector had deal volume for April 2023 behind what was seen at the beginning of COVID-19 in April 2020 and significantly behind what was seen at this same time last year, in H1 2022. However, according to Real Capital Analytics, the individual asset deal volume for April 2023 was still 26 percent higher than the pace set in April 2020.
Market Performance and Outlook
Vacancy & Rents
According to Commercial Edge, in the past year, average rents for industrial real estate have consistently increased and reached an all-time high of $7.15 per square foot as of March 2023. Vacancy rates in the industrial sector have remained exceptionally low nationwide, averaging 3.9 percent. Only seven of the top 30 industrial metros recorded vacancy rates of five percent or higher.
Sales
Demand for industrial real estate has moderated at an institutional/portfolio-level, but warehouse and single-asset industrial investments remain active. Investors are optimistic about the market but are evaluating individual industrial real estate asset sales based on income stability and local economic conditions for each property.
Institutional Activity
The pullback in industrial real estate activity is partly due to institutional investors growing more cautious about the sizing of their equity checks. As a form of risk management, real estate investment trusts are making smaller investments across a broader geography to limit exposure to any one asset or market. Capital continues to look to the country’s interior to find opportunities to source higher yields and avoid the highly competitive coastal real estate markets. Steadier sales activity in smaller markets may be a developing trend relative to the current fluctuations in some primary locations. Moreover, primary real estate markets are experiencing roughly 25 percent declines in transaction volumes compared to sector peaks in Q2 2022, according to CoStar Group.
Cap Rates
Industrial cap rates have been increasing but are low relative to historical trends, currently averaging around 5.4 percent. Real estate prices are also starting to slip, relative to March 2023, prices fell at an annualized pace of 5.6 percent in April. The real estate market is moving toward a price discovery period where new financing terms create uncertainty around industrial property values. In addition, borrowers’ loan payments adjust to higher rates. Therefore, increasing cap rates to preserve total return is diluting industrial asset values.
Nevertheless, current outlooks for the industrial market indicate strong and positive demand. While transactional activity has slowed across various property sectors, industrial sales have seen record-breaking price-per-square-foot figures in Q1 2023. – Source: Commercial Edge
Construction
As of April 2023, the total amount of new industrial CRE space under construction across the nation was 616.4 million square feet, according to data provided by Commercial Edge. At the same time, an extra 721.9 million square feet were in the planning process.
In Q1 2023, approximately 127 million square feet of industrial space was delivered. If this pace continues, it will surpass the previous year’s record of 489 million square feet of deliveries.
Industrial property’s outlook anticipates that this diminishing pipeline is an indication of future trends. Developers are increasingly concerned that higher interest rates are causing values of newly delivered projects to dip below replacement costs. Given the average construction time of about 13 months for recently completed large industrial projects, this recent pullback in starts signals that by spring 2024, the number of new projects completing construction each quarter will begin to decline rapidly. This may set the stage for vacancies to stabilize or begin to tighten again by late 2024 and for rent growth to reaccelerate, particularly if the global economy is emerging from the current slowdown.
The rapid pace of development observed in recent years is expected to shift towards more moderate levels. The deceleration in the pipeline can be attributed to commercial banks adopting stricter lending standards for construction loans. Financing options for industrial development have become less readily available compared to previous years. These factors collectively contribute to the anticipated slowdown in the industrial property development landscape.
Top Performing Industrial Properties
E-commerce Fulfillment Centers
E-commerce fulfillment centers have been in high demand as online purchasing has grown significantly. These properties serve online merchants’ storage, sorting, and distribution needs by offering efficient logistics and speedy order fulfillment. The top leading e-commerce fulfillment centers include Fulfillment by Amazon, ShipBob, Red Stag Fulfillment, Rakuten Super Logistics, and FedEx Fulfillment.
Data Centers
The growing reliance on cloud computing, big data, and digital services has resulted in a boom in data center demand. Servers and networking equipment are housed in these facilities, providing a safe and dependable data storage, processing, and management infrastructure. The location of a data center depends on several factors, such as proximity to power sources, connectivity options, climate conditions, and available land. In some cases, data centers may be concentrated in specific areas that offer favorable conditions, such as regions with abundant renewable energy sources or areas with established technology infrastructure. Some examples of Data Centers include Google Data Centers, Microsoft Azure Data Centers, Amazon Web Services, Facebook Data Centers, and Equnix Data Centers.
A few recent 2023 transactions include: (Source: CoStar Group)
- 21800 Beaumeade Cir, Ashburn, VA
Starwood Capital Group acquired the property from H5 Data Centers for $17 million on January 31, 2023. The property is a one-story, 70,000-square-foot powered-shell data center facility with access to 8 megawatts (MWs) from Dominion Power. The facility has four computer rooms across 38,000 square feet of space with the ability to support more than 1500 cabinets. The facility is expandable to 108,000 square feet.
- 200 Summit PL, Oak Ridge, TN
On February 28, 2023, this 30,000-square-foot industrial building was sold for $2,109,000 or $70 per square foot.
- 16815 197th Ave NW, Big Lakke, MN
On 3/31/23, the 12,327 SF property was sold for $3,389,372 or approximately $274.96 per square foot.
- 9100 U.S. Highway 287, Fort Worth, TX
The data center was sold in a bankruptcy sale on April 12, 2023.
Last-Mile Distribution Centers
Last-mile distribution centers are becoming increasingly popular as the demand for faster and more convenient deliveries grows. These facilities, which are positioned in urban centers, allow for the efficient and timely transportation of goods to end consumers, ensuring a smooth supply chain. The top last-mile carrier providers include FedEx, UPS, and USPS.
Two recent 2023 deliveries include: (Source: CoStar Group)
- 7458 New Ridge Rd
Amazon Warehouse
- 11800 Brewers Spring Rd
Amazon IAD-52
Cold Storage Facilities
Demand for cold storage facilities has increased as the food and pharmaceutical industries have grown. These properties provide temperature-controlled settings for storing perishable commodities such as fresh produce, frozen food, and pharmaceuticals, ensuring the quality and safety of the goods.
A few recent 2023 transactions: (Source: CoStar Group)
- 20800 Spence Rd, Salinas, CA
The property sold for $19.4 Million.
- 1503 N 6th Ave, Yakima, WA
Cold Storage – Greater Yakima Submarket
- 1814 Industrial Blvd, Jacksonville, FL
Cold Storage – West Side Submarket
- 13908 E Parlier Ave, Parlier, CA
Cold Storage – Outlying Fresno County Submarket
Industrial Parks and Flex Spaces
Industrial parks and flex spaces include various sites that serve different industrial and manufacturing purposes. These locations attract a diverse spectrum of tenants by offering customizable spaces, flexible lease terms, and easy access to transit networks.
A few recent 2023 deliveries include: (Source: CoStar Group)
- 1110 Old Dixie Hwy, Vero Beach, FL
Dixie Commercial Center
- 2300 Commerce Parl Dr, Palm Bay, FL
Woodlake Commerce Park Light Manufacturing Condo
- 550 West Ave, Stimford, CT
Stamford Executive Park R&D – Stamford Submarket
- 1937-1985 10th Ave N, Lake Worth, FL
Gaslight Business Park Light Distribution Condo
Advanced Manufacturing Facilities
Automation and robotics, for example, have boosted the demand for modern production facilities. These properties have specialized infrastructure that supports high-tech manufacturing processes and allows for efficient production.
A few recent 2023 deliveries include: (Source: CoStar Group)
- 1813 137th Ave E, Sumner, WA
Manufacturing – Puyallup/S Hill Submarket
- 2848 E 208th St, Carson, CA
Manufacturing – Carson Submarket
- 9201-9301 San Mateo Blvd NE, Albuquerque, NM
Manufacturing – North I-25 Submarket
- 1701 Westinghouse Blvd, Charlotte, NC
Manufacturing – State Line Submarket
Automotive Plants
More than 20 large electric vehicle, battery, and semiconductor plants are planning to open across the U.S., and suppliers to these facilities will likely generate millions of square feet of additional leasing over that period.
As Tesla and Navistar opened their electric vehicle plants in the Austin/San Antonio area in early 2022, several other suppliers have announced plans to open distribution centers and manufacturing operations nearby. This trend will likely be replicated in Sunbelt markets, including Phoenix, and the I-85 corridor, both of which have several EV or Semiconductor plants targeting openings in 2024 – 2025.
Top Industrial Markets
The performance of industrial assets can vary by location and market conditions. Vacancy rates, rental growth, and lease terms significantly influence the property’s performance. Conducting thorough market research and analyzing specific local dynamics is essential when deciding which industrial asset to acquire.
According to RCA, the following metro areas experienced the highest sales volume in the last 12 months.
- LA Metro
$2,284M
- NYC Metro
$750M
- Chicago
$749M
- SF Metro
$628M
- Dallas
$436M
Coastal markets with significant economic activity have demonstrated strong growth in industrial rents, but in comparison to other markets, are expensive, deterring investment given current market conditions. However, recent absorption slowdown is broad-based across most markets. Still, Los Angles, the Inland Empire, and Las Vegas recorded outsized increases in space being listed as available for lease among existing properties.
While imports have been declining at the national level since November 2022, the slowdown has been most pronounced at the Port of Los Angeles, where cargo flows are being negatively impacted by both the late 2022 and early 2023 COVID-19 wave in China, as well as by the risks of a strike by the West Coast dockworkers. Many importers have diverted cargo to major East Coast ports, accelerating a long-term shift that has allowed major East and Gulf Coast ports such as Newark, Savannah, Houston, Norfolk, and Charleston to lead the U.S. in import growth.
Several other markets, including Lehigh Valley, Richmond, Tampa, Jacksonville, Detroit, and Reno, have bucked the national trend and recorded tightening availability since mid-2022 among industrial properties larger than 100,000 square feet, according to CoStar Group.
