• National industrial in-place rents averaged $7.10 per square foot in January, up 6.9% year-over-year  
• The national vacancy rate stood at 4.0%, up 10 basis points month-over-month 
• Nationwide, 691 million square feet of industrial space was under construction 
• Industrial transactions totaled $1.1 billion at an average sale price of $125 per square foot 
• Western markets posted the widest lease spreads, with the Inland Empire registering a spread of 28.2%  
• Columbus recorded the second lowest vacancy rate nationwide at 1.7% 
• Dallas led the nation in development with a 61.6 million-square-foot pipeline 
• New Jersey sales volume second highest among leading markets at $149 million 

Demand for industrial space has remained elevated since the onset of the pandemic and owners are benefiting from this when leases expire. Yardi Market Insight, a cutting-edge service that uses anonymized and aggregated data from other Yardi platforms found that of the 63 markets it covers, 44 reached a lease spread greater than 10%. Of these, 16 markets had spreads wider than 20% in January.  

The widest spreads are generally found in port markets and logistics hubs, although some tertiary and emerging markets have also seen outsized lease spreads as well, the CommercialEdge U.S. industrial market report noted.

“Savvy investors are already seeking out projects with shorter lease expiration schedules and seem to be willing to pay a premium for them. It’s another opportunity to benefit from the historic run-up in rates as vacancy remains tight.”

Peter Kolaczynski, CommercialEdge Senior Manager

With such substantial spreads, properties with leases that expire soon will be more attractive on the transaction market. Given the current interest rate environment and economic uncertainty, leasing expiration schedules could be the difference between a deal penciling out or not. 

Rents and Occupancy: New Supply to Put Slight Upward Pressure on Vacancy Rates 

National in-place rents for industrial space averaged $7.10 per square foot in January, up 6.9% year-over-year and seven cents over December, according to the CommercialEdge industrial market report. Leases signed in the last 12 months reached a national average of $9.01 per square foot, $1.88 more than in-place contracts.  

Some of the widest spreads between new leases and the market average were in Los Angeles ($7.26 more per square foot), the Inland Empire ($6.06), Orange County ($5.43), New Jersey ($3.61), Nashville ($3.35) and Miami ($3.31) — a trend that held steady over the past few quarters with little variation.  

Average Rent by Metro

The national vacancy rate was 4.0%, an increase of 10 basis points over the previous month. After months of decreases, this marks the second month in a row that the national vacancy rate has increased. The upticks have been minor but are likely driven by record levels of new supply. It will be worth watching if vacancies continue a slow upward push or plateau off in coming months. 

The lowest industrial vacancy rates in the country were found in the Inland Empire (1.6%), Columbus (1.7%) and Charlotte (2.2%). Despite the low vacancy rates, heavy new supply is putting downward pressure on industrial rent rates in some markets, especially in those with more developable land. For instance, in Charlotte, rents increased only by 2.8% year-over-year in January, meanwhile industrial projects underway accounted for 5.3% of existing stock — the third largest pipeline nationwide on a percentage-of-stock basis. 

Supply: Logistics Remain a Major Driver of Industrial Development

Nationally, 691 million square feet of new industrial supply was under construction as of January, accounting for 3.8% of existing inventory. An additional 706.6 million square feet were in the planning stages, for a potential stock increase of 7.7%.   

Industrial Space Under Construction (Million Sq. Ft)

While industrial construction is happening in markets across the country, much of it is concentrated in a handful of markets. The 10 largest pipelines make up nearly 40% of all stock under construction and the top two markets (Dallas and Phoenix) account for one-sixth of all square footage currently being built. 

Most of the new construction is fueled by the logistics sector, especially in Dallas. The largest project in the market is a 2.5 million-square-foot Walmart fulfillment center in Lancaster, Texas. Beyond that property, there are 13 logistics buildings under construction — including both new properties and expansions at existing sites — that are larger than one million square feet. 

Transactions: Sales Activity Likely to Slow in 2023 Despite Investor Appetite

There were $1.1 billion in industrial transactions in January, according to the CommercialEdge industrial report. The national average sale price in January of this year came in at $125 per square foot. 

Although demand for industrial real estate remains high, transaction volume is likely to fall this year, industrial property outlooks predict. Rising interest rates are slowing investment across all asset classes and the industrial sector is not immune. The higher cost of capital is leading investors to reevaluate their allocations and underwriting assumptions. 

2023 Year-to-Date Sales (Millions)

Investors are also worried that inflation could continue to eat away at yields if leases at properties include only minor escalations. A potential recession on the horizon could dampen tenant demand in all but prime markets, although vacancies are tight enough that a mild economic downturn would likely have minimal effect.   

The run-up in prices that has occurred over the last few years means that there is a smaller pool of attractive properties that can pencil out for investors. The average sale price of an industrial property in the fourth quarter of 2022 was $134 per square foot, a 76% increase from the first quarter of 2019. 

Western Markets: Southern California Logs the Highest Lease Spreads in the Country 

The ports of Los Angeles and Long Beach set records for numbers of containers handled in recent years and were a key bottleneck during the worst of the supply chain crisis. This led to skyrocketing demand for industrial space and, in turn, to Southern California having some of the nation’s largest leasing spreads.  

The Inland Empire, the hottest industrial market in the country, recorded a lease spread of 28.2%, Los Angeles 22.8% and Orange County 14.9%. Southern California industrial markets are so crowded that nearby markets are experiencing overflow demand. The Central Valley’s lease spread stood at 17.2%, Las Vegas’ at 15.9% and Phoenix had a spread of 16.5%.  For Phoenix, the wide lease spread is especially noteworthy as the market delivered more than 52 million square feet in the last three years for a 15% stock increase. 

Southern California’s wide spreads meant that in Los Angeles a new lease cost $7.26 more per square foot, in the Bay Area $6.18, in the Inland Empire $6.06 and in Orange County $5.43. Taking into account that Orange County, Los Angeles and the Bay Area were the only markets where overall lease rates were in the teens, new contracts were being inked at dizzying rates. In Los Angeles, new contracts were just 5 cents short of $20 per square foot. At the same time, the Bay Area and Orange County averaged $18.30 per square foot for new leases.  

West Regional Highlights 

The four Southern California markets where new leases surpassed $10 per square foot, were joined by two more western counterparts: Portland and Seattle. Here, new leases averaged $10.45 per square foot and $10.72 per square foot, respectively.  

Similarly, Western markets also claimed some of the lowest vacancy rates among the country’s leading industrial markets. Specifically, the Inland Empire remained the tightest market with a vacancy rate of just 1.6%. Furthermore, Phoenix tied with Indianapolis for the fifth lowest vacancy rate among leading markets at just 2.4%, with L.A. close behind at 2.8%. Admittedly, some Western markets had somewhat higher vacancy rates. Specifically, Portland, Denver and Seattle surpassed the 4% national average, with January vacancy rates at 4.7%, 5.4% and 5.5%, respectively. 

Tight vacancy rates continue to push new construction across the country, with most of that supply developed in a handful of leading markets. In fact, the 10 most significant industrial markets account for 40% of stock currently under construction, with about 15% of the national construction pipeline to be delivered in Dallas and Phoenix.  

Industrial Space Under Construction & Planned (% of stock) 

As has increasingly been the case since the pandemic, the still-growing pressure of demand placed on Southern California has increasingly spilled over into Phoenix, where there are fewer challenges for industrial development, especially in terms of land availability and land acquisition costs.  

As a result, Phoenix reached an under-construction pipeline of 52.5 million square feet, the largest pipeline on a percentage of stock basis and second only to Dallas in terms of square feet. At the same time, the Inland Empire’s pipeline closed January at 30 million square feet for the third largest pipeline nationwide, while Denver’s 12.8 million square foot under construction total equaled 5.1% of its current stock — the fourth largest in the U.S. on a percentage-of-stock basis. 

Looking at transactions, the Bay Area led the country in the first month of 2023, closing $169 million in sales at $237 per square foot. Seattle also stood out with the fifth largest sales volume in January at $48 million for an average price of $325 per square foot, a rate surpassed only by Los Angeles at $449 per square foot. 

Midwestern Markets: Rent Growth Remains Slow Even in Established Logistics Hubs 

The Midwest’s most active logistics markets registered some of the lowest industrial vacancy rates in the country, with Columbus at 1.7% and Indianapolis at 2.4%. And while these rates outperformed even port markets, including Los Angeles’ and New Jersey’s 2.8% rates, the Midwest’s markets remained among the slowest in the U.S. 

To begin with, rent growth has been sluggish in the Midwest. Even low-vacancy markets such as Indianapolis and Columbus, recorded year-over-year increases below the 6.9% national rate in January. Specifically, Indianapolis logged a 3.4% rent increase, with Chicago and Columbus inching up 3.5%. The Twin Cities market experienced a rate gain of 3.3% and St. Louis a mere 2.1%.  

Lease spreads were also the lowest in Midwestern markets, especially those that have not established themselves as logistics hubs. In Kansas City the spread was 4.4%, in St. Louis it stood at 4.8%, while Chicago and the Twin Cities registered spreads of 5.4% and 5.8%, respectively. Yet even in Indianapolis, one of the most active logistics markets in the country, the lease spread was only 7.6% in January. 

Midwest Regional Highlights 

The slower growth in rents and lease spreads in the region can be attributed to a more rapidly expanding industrial inventory. New supply is much easier to build in these places than the port markets, giving tenants more of an upper hand in rent negotiations than they would have in Southern California or along the East Coast.  

On a percentage-of-stock basis, Indianapolis had the largest construction pipeline in the Midwest, with 4.6% of its stock underway, followed by Columbus with 4.5% of inventory under construction. In terms of square footage, Chicago came in first with more than 26.8 million square feet of space under construction.  

As markets with substantial lease spreads are expected to be the most attractive to investors, sales activity in January remained low in the Midwest overall. Nonetheless, Indianapolis recorded the third largest sales volume nationwide with $112 million, traded at $123 per square foot. The fourth largest volume was recorded in Columbus, where investors closed $50 million in industrial sales at an average of $303 per square foot. 

Southern Markets: Logistics Drives Dallas Construction 

Among the top 30 U.S. industrial markets CommercialEdge surveyed, Charlotte recorded the third lowest vacancy rate at 2.2%, coming in after the Inland Empire (1.6%) and Columbus (1.7%). Miami, Nashville and Atlanta followed with 2.6%, 3.0% and 3.2%, respectively. Most leading markets in the South registered vacancy rates below the national rate of 3.8%, except for Memphis (4.5%), Tampa (5.5%) and Houston (8.8%). In fact, Houston had the highest vacancy rate nationwide.  

Despite the low vacancy rate, rent growth was slow in Charlotte, rising only 2.8% year-over-year in January. Nonetheless, markets such as Miami and Atlanta saw average lease prices rise 7.2%, exceeding the 6.9% national rate.  

The widest lease spread in the South was recorded in Nashville, where in-place rents stood at $5.47 per square foot, while new leases signed over the past 12 months averaged $8.82 per square foot. Tenants in Miami also signed at robust premiums, with new leases costing $3.31 more than in-place rents. These were also some of the widest spreads recorded nationwide, although they were comfortably outpaced only by Southern California markets and New Jersey.  

When it came to markets with high vacancy rates, lease spreads were more modest: Houston in-place rents stood at $6.26 per square foot, whereas new leases were signed at $6.40. 

South Regional Highlights 

Dallas – Fort Worth had the largest pipeline in the country with 61.6 million square feet under construction and an additional 49.5 million square feet in the planning stages. The Metroplex has been an industrial boomtown for a while now, delivering more than 199 million square feet (23% of stock) since the start of 2016, with much of that in logistics parks or large fulfillment centers. Despite massive levels of new supply, the Dallas industrial vacancy rate sat at 3.6% in January. 

Among southern markets, Charlotte recorded the largest sales volume in January: It closed $47 million in industrial deals at $111 per square foot. However, in terms of price per square foot, Dallas came in first with $125, in line with the national average. At $105 per square foot, Nashville was the only other Southern market with a sale price above $100 per square foot. 

Northeastern Markets: $149 Million New Jersey Sales Volume Second Highest in the U.S. 

Akin to what’s happening on the West Coast, overflow demand on the East Coast is driving up lease spreads both in port markets and in adjacent places. For example, Allentown-Bethlehem had a lease spread of 21.6% as of January, Boston sat at 22.5% and New Jersey at 18.8%. In Boston, that translated into a premium of $2.42 per square foot for newly inked leases, while New Jersey industrial contracts were signed for an average $3.61 per square foot more in January.  

It also meant that in both Boston and New Jersey, new leases surpassed the $10 per square foot threshold. They were two of only nine markets nationwide to reach that level. Specifically, new leases averaged a rate of $12.82 per square foot in New Jersey, while Boston tenants signed at $11.57 per square foot in January. 

While Boston’s vacancy rate was on the higher end, New Jersey continued to post one of the lowest figures among leading industrial markets at 2.8%. At the same time, Philadelphia was in line with the national average of 4.0%, closing January with a vacancy rate of 4.1%. 

Northeast Regional Highlights 

In terms of development, Philadelphia had close to 20 million square feet of new industrial space under construction in January, representing 4.8% of its existing stock — the sixth highest supply pipeline in the U.S. But Philadelphia is planning for even more, with projects under construction and those in the planning stages potentially increasing the local stock by as much as 12.6%.  

New Jersey also ended January with a robust pipeline: 11 million square feet of space were under construction that will increase this East Coast port market’s footprint by 2.0%, while planned projects might add another 2.2%. Boston had a more modest pipeline compared to both cities, but the 6.6 million square feet of space under construction here will increase the local industrial stock by 2.8%. 

When it came to sales, both Boston and Philadelphia were off to a slower start: January sales totaled $3 million in Boston and $4 million in Philadelphia. While Boston posted a modest average sale price, Philadelphia’s industrial deals averaged $149 per square foot. New Jersey, however, was off to a dynamic start: industrial assets traded for an average of $202 per square foot, totaling $149 million. That meant that New Jersey had the second largest sales volume in January, surpassed only by the Bay Area’s $169 million total.   

Economic Indicators: Warehouse Employment Continues to Slide

The e-commerce boom that began with the pandemic led to a massive upsurge in employment in the warehousing and storage sector of the economy, according to the Bureau of Labor Statistics. Between April of 2020 and June of 2022, the sector grew by 46%, adding 695,000 workers. Since that June peak, however, the sector has lost 20,000 workers. 

Economic Indicators 

There are multiple drivers of the decline in warehousing and storage employment. A tight labor market is allowing workers to find higher-paying jobs, while service jobs that disappeared during the pandemic have since returned. Yet the main force behind the contraction is the largest employer in the sector: Amazon.  

The e-commerce behemoth has delayed, paused or outright canceled facilities and listed millions of square feet for sublease. Amazon’s frenzied hiring during the first two years of the pandemic fueled most of the growth in the sector but now the company has slowed hiring. A turnover rate estimated to be higher than 100% means that a slowdown in hiring leads to declining employment. 

Warehousing and Storage Employment 

Download the complete February 2023 report for a full picture of how U.S. industrial markets fared in the first month 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 office 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 Yardi Matrix and may differ from regional boundaries defined by other sources. 

The post Port Markets and Logistics Hubs Record Hefty Premiums for New Industrial Leases  appeared first on CommercialEdge.

• National industrial in-place rents averaged $7.03 per square foot, up 6.3% year-over-year as demand continued to outpace supply 
• The national vacancy rate contracted 180 basis points in 2022 as new deliveries were absorbed at a rapid pace 
• More than 450 million square feet of industrial space was delivered last year, setting a new industry record 
• The year ended with $88 billion in industrial sales, a robust volume but one that was noticeably below 2021 totals 
• Western markets posted the six highest sale prices nationwide, with Orange County closing 2022 at $369 per square foot 
• Columbus tied with Nashville for second-lowest vacancy rate nationwide at just 1.8%, and Indianapolis close behind at 2.3%  

• Dallas led the nation in development with 64 million square-foot pipeline as well as sales with $8.8 billion volume 
• At $3.53 per square foot, New Jersey lease premiums ranked among the five highest in the country 

New industrial supply hit record levels in 2022, and 2023 is expected to reach yet another generous volume of new deliveries. In the 118 markets covered by CommercialEdge, more than 450 million square feet were delivered last year, with another 713 million square feet under construction at the end of the year, according to the latest U.S. industrial market report. 

“Even as demand waned slightly the last third of the year, the appetite for these new, high-quality facilities was incredibly strong throughout 2022.” 

Peter Kolaczynski, CommercialEdge Senior Manager

Despite historic levels of new supply, this pace of development was not enough to keep up with demand. Thus, the average vacancy rate for the top 30 markets fell steadily throughout the year, closing 2022 at 3.9%. Our industrial property outlook predicts that due to a cooling economy and healing supply chains, absorption will be positive this year, but lower than in previous years. 

Nonetheless, demand for industrial space will remain substantial across the U.S., driven by high import levels, e-commerce and the need for last-mile facilities. In light of this, developers will continue to expand the national industrial stock — over the next five years, the U.S. industrial footprint could increase by roughly 12.6%, according to CommercialEdge supply forecasts.   

Construction: Completed & Forecasted

Rents and Occupancy: Southern California Drives Largest Gains in Leases 

National in-place rents for industrial space averaged $7.03 per square foot in December, growing 6.3% year-over-year and three cents over the previous month. Leases signed in the last 12 months reached a national average of $8.84 per square foot, $1.81 more than in-place contracts. 

The largest spreads between new leases and the market average were in Los Angeles ($7.24), the Inland Empire ($5.66), Orange County ($4.96), Nashville ($3.75) and New Jersey ($3.53), trends that were mostly steady throughout the year.  

Average Rent by Metro

Up 10 basis points from November, the national industrial vacancy rate stood at 3.9% in December, dropping 180 basis points over the last 12 months. The lowest vacancy rates in the nation were in the Inland Empire (1.1%), Nashville (1.8%), Columbus (1.8%), Indianapolis (2.3%) and Los Angeles (2.4%), markets that contended with low vacancies throughout the year. 

In order to ease that pressure, many of these low-vacancy markets have robust development pipelines, such as the 31 million square feet under construction in the Inland Empire and the nearly 18 million square feet Indianapolis is currently developing.   

Supply: Record 450 Million Square Feet of New Supply Delivered in 2022

Nationally, 713.0 million square feet of industrial stock were under construction at the end of 2022, representing 4.0% of stock. An additional 698.4 million square feet were in the planning stages. 

Last year saw more than 450 million square feet of industrial supply delivered, a record for new development. The markets with the most supply delivered last year were Dallas (31.5 million square feet), Indianapolis (24.8 million), Chicago (23.4 million), Phoenix (21.3 million) and the Inland Empire (20.4 million). While industrial development was and remains widespread across the country, those top five markets accounted for 27% of all new stock in 2022. 

Industrial Space Under Construction (Million Sq. Ft)

In 2022, 25 of the 118 markets covered by CommercialEdge had their highest levels of new development since at least the turn of the century. Indianapolis, Phoenix, Savannah-Hilton Head (14.6 million square feet), Kansas City (11.7 million), New Jersey (11.1 million) and Austin (10.4 million) were among the markets that saw record levels of new industrial stock delivered in 2022. With more new supply than ever currently under construction, 2023 is expected to be another record-setting year for industrial deliveries. 

Transactions: Deal Flow Slows in Second Half of 2022

There were $88.3 billion in industrial transactions during 2022, although a certain lag in collecting sales data means that 2022 numbers will continue to climb. One thing is undeniable, however: Last year is certain to come in under the $125.7 billion in 2021. 

Year-over-year sales were up in the first half of last year but fell quickly in response to rate increases by the Federal Reserve. Rising interest rates were the main reason why the national sales volume fell in the second half of 2022, but the fact that industrial properties are much more expensive than they were even a few years ago is also a factor. The average sale price of an industrial building has skyrocketed, from $83 per square foot in 2019 to $132 in 2022, representing an increase of 57%.

Year-to-Date Sales (Millions)

Even as rents have increased rapidly, investor appetite for industrial has pushed prices high enough to diminish opportunities for yield. Investors may now need to assume current rent growth will continue for the foreseeable future in order for deals to pencil out, given current prices and borrowing costs. 

Under these circumstances, transaction volumes are likely to continue to slow in 2023, although once the Fed pauses interest rate hikes it may provide enough stability to the market for deal flow to pick up steam again. With demand for industrial space still elevated and supply still playing catch-up, prices are not expected to fall much, if at all, in 2023. 

Western Markets: Phoenix Construction Pipeline Reaches 55 Million Sq. Ft. With Planned Projects Potentially Doubling That Volume 

The Inland Empire led the country in industrial rent growth, with rates increasing 14.2% over the last 12 months. Although backlogs that were plaguing the ports of Los Angeles and Long Beach eased during 2022, demand for space in Southern California continued to be hot and vacancy rates remained tight. Los Angeles was the second-fastest market for rent growth at 10.4%, and Orange County was fourth with 7.3% growth in the last 12 months.  

The demand for industrial space in Southern California has been so intense that there has been a spillover into Phoenix, a six-hour drive from the ports of Los Angeles and Long Beach. In Phoenix, rents have grown 7.1% over the last 12 months despite 21.3 million square feet being delivered in 2022.  

To further absorb spillover demand from Southern California, Phoenix has an astounding 55 million square feet of new supply underway which will increase the existing local stock by 18.3%. That is by far the largest supply pipeline on a percentage-of-stock basis in the country, with the next-closest being the Dallas-Fort Worth market at 7.5%. And the Phoenix industrial boom is far from slowing down, as planned projects would further increase the local stock by 20.8%.

West Regional Highlights  

While many companies are reorienting to Phoenix for their industrial space needs, Southern California is also pushing ahead with development where space availability allows. Los Angeles and Orange County struggle with space constraints, evident in their respective construction pipelines: 3.3 million square feet in Los Angeles and 1.2 million in Orange County. But the Inland Empire has the third largest development pipeline in the country, with 31 million square feet under construction at the end of 2022, with nearly the same amount currently in the planning stage. 

Although its sales volume was a far more modest $1.15 billion, Orange County boasted the highest sale price nationally by a wide margin, averaging $369 per square foot. In fact, the six highest sale prices were all claimed by Western markets: The Inland Empire featured the second-highest sale price nationally at $289 per square foot, with Los Angeles close behind at $287 per square foot. They were followed by Seattle’s $246 per square foot rate, the Bay Area’s $232 per square foot average and Phoenix at $198 per square foot. 

Returning to Southern California, Los Angeles and Orange County also had the second- and third-largest sales volumes in 2022, outpaced only by Dallas’ $8.78 billion total. Specifically, Los Angeles totaled $5.1 billion in industrial sales last year, followed closely by the Inland Empire’s $4.99 billion.  

On the other end of the spectrum stood Central Valley with only $640 million in industrial deals, the second-lowest volume among the country’s leading markets. It also had the lowest sale price among the West’s top markets, averaging $92 per square foot in 2022.  

Midwestern Markets: Columbus and Indianapolis Post Two of the Three Lowest Vacancy Rates Nationwide  

While the Inland Empire remained the uncontested leader in occupancy, closing 2022 with a vacancy rate of just 1.1%, Midwest markets also stood out. Specifically, Columbus tied with Nashville for the second-lowest vacancy rate in the country at just 1.8%, followed by Indianapolis at 2.3%, outpacing Los Angeles and its 2.4% rate. 

But while Southern California rents remain the highest in the country by wide margins, Midwestern markets, including its tightest, continued to post some of the most affordable rents among the country’s top markets. Columbus, for example, had the lowest lease rate at just $4.14 per square foot, Indianapolis had the second lowest at $4.29 per square foot, with St. Louis and its $4.32 per square foot rate next.  

Midwestern markets also closed 2022 with some of the lowest sale prices the country’s most important industrial markets, remaining — as they have been throughout the year — among the more affordable markets for commercial real estate players looking to enter the industrial sector with lower stakes investments.  

Midwest Regional Highlights

For example, Kansas City posted the lowest sale price among leading markets at just $53 per square foot which also resulted in the smallest sales volume: $631 million in total. Detroit and Columbus were next at $76 per square foot and $78 per square foot respectively. In fact, the Twin Cities market was the only one to surpass $100, closing the year at an average sale price of $102 per square foot. 

Consequently, Midwestern markets also had more modest sales volumes, ranging between $1.04 billion and $1.37 billion, with two notable exceptions: Chicago and Kansas City. The latter had the lowest sales volume among the country’s top industrial markets, having totaled just $631 million in industrial deals in 2022. Chicago, however, had the fourth-highest sales volume nationwide: It closed $1.16 billion in industrial deals, despite a sale price of just $87 per square foot.  

One major factor in keeping industrial leases far more affordable than those in comparably tight markets was the region’s robust construction pipeline. Chicago closed 2022 with the fourth-largest development pipeline in the country at 28 million square feet. That represented 2.8% of Chicago’s existing stock, while planned projects could add the equivalent of 3.5%. 

When looking at development pipelines from the perspective of percentage-of-stock, Columbus and Indianapolis stood out as two of the five leading markets. Specifically, Columbus had the equivalent of 5.8% of its stock under construction at the end of 2022, while Indianapolis was developing 5.3%. 

Southern Markets: Dallas Leads the Nation in Development, Sales Volume 

Nashville remained the leading Southern industrial market in terms of occupancy rate, with only 1.8% of available space across the market. It was followed by Miami at 3.0%, Atlanta and Charlotte at 3.3%, and Dallas – Fort Worth at 3.8% — the only markets with industrial vacancy rates below the 3.9% national average. In contrast, Houston had the highest industrial vacancy rate at 7.7% both in the South and nationwide. 

At the same time, markets with higher vacancies also saw more modest rent increases. For instance, Houston saw lease rates increase 2.1% year-over-year in December, while Memphis and Tampa rents gained 2.6% and 2.9%, respectively. Atlanta led rent growth in the region at 6.9%, becoming the only Southern market that outpaced the national growth rate of 6.3%. Baltimore, for example, was up 5.6% and Nashville lease rates appreciated 5%. 

Although Southern markets had more modest lease spreads, Nashville stood out: While in-place rents averaged $5.23 per square foot here, new leases signed over the past 12 months averaged $8.98. Similarly, Miami’s in-place rents stood at an average of $9.72 per square foot, whereas new contracts signed at $13.05 per square foot.  

South Regional Highlights

The Dallas – Fort Worth Metroplex led construction in the South, as well as the nation, with 64.2 million square feet of industrial space under construction as of December, accounting for 7.5% of total stock. Considering projects in the planning phases as well, the Metroplex’s industrial stock could increase by as much as 13.5%.  

The Dallas – Fort Worth industrial market also attracted the most capital in 2022 nationwide, recording $8.78 billion in sales, at an average price per square foot of $180. Despite its sluggish fundamentals, Houston had the second-largest sales volume in the South and the fifth-largest across the U.S., with more than $4 billion in industrial deals. When it came to pricing, industrial facilities traded at an average of $131 per square foot in Houston, in line with the $132 national rate.   

Northeastern Markets: Imports Expected to Keep Demand High for New Jersey Industrial Space 

New Jersey continued as one of the strongest industrial markets in the nation, with its vacancy rate resting at 2.6% at the end of 2022, slightly above the 2.4% recorded in Los Angeles but below Orange County’s 3.0% rate. New Jersey also saw a robust uptick in industrial rents in the 12 months ending in December, climbing 8.4%. This is above the 6.3% year-over-year national growth and the third highest in the country.  Rent growth in New Jersey is expected to continue, as new lease premiums reached $3.53 per square foot — the fifth widest lease spread in the U.S. 

Boston and Philadelphia registered rent increases more in line with the national average, up 6.5% and 6.0% year-over-year in December. Rates for new leases were also higher than in-place rents in both markets, with a spread of $1.68 per square foot in Boston and $1.48 in Philadelphia.  

Northeast Regional Highlights

Across leading northeastern industrial markets, investors closed roughly $8.28 billion in transactions over the course of 2022. New Jersey topped the list with $3.42 billion in sales, at a price per square foot of $182 — also the highest in the region. Comparatively, Boston totaled merely $1.78 billion in sales over the same period, although its average price of $180 per square foot was close to that of New Jersey.  

Philadelphia led the Northeast in terms of new supply, with nearly 20 million square feet of industrial space in the pipeline, representing 4.9% of total stock. Meanwhile, Boston had 6.5 million square feet, or 2.9% of its stock underway, and New Jersey had 12.4 million square feet, or 2.3% of the local stock under development. 

Economic Indicators: Producer Prices Cool in December 

Wholesale prices for goods and services fell in December, according to the Bureau of Labor Statistics. The headline Producer Price Index — which measures the prices paid by business — fell by 0.5% in December and finished 2022 up 6.2% on the year. 

The decline in December was the biggest drop in the PPI since April 2020. The goods component of the index fell 1.6% in the month (up 7.9% year-over-year) and service increased 0.1% (up 5.0% year-over-year). Much of the decline was driven by decreases in energy prices. Core PPI, which excludes food and energy, increased by 0.1% in the month (5.5% year-over-year). 

Producer Price Index

The Fed’s interest rate hikes have been aggressive in an attempt to bring down inflation, and the latest readings of the PPI and Consumer Price Index indicate that the rate increases may be working. Price pressures such as supply chain backlogs have eased, and the outlook for inflation in 2023, while higher than averages seen in recent decades, looks to be much tamer than in 2022. 

Trends & Industry News: Industrial Market Outlook Solid for 2023 

Industrial went through a massive shift in recent years: Demand skyrocketed, vacancies plummeted, and investors drove up average sale prices by more than 50% in three years. But 2023 may be when things finally normalize. The CommercialEdge industrial property market report predicts that the sector will cool somewhat but continue to expand and remain one of the more attractive asset classes in commercial real estate. 

Rising interest rates and a looming recession will slow leasing activity as businesses pause expansion plans and grapple with a higher cost of borrowing. Supply-chain normalization will lead to less need for increased inventories than was common in recent years, further slowing leasing.  

Still, import flow will continue to drive demand in already tight port markets, and we anticipate the overcrowding of Southern California ports and increased demand for industrial space along the East Coast in markets like New Jersey, Houston and Savannah-Hilton Head. Interest rate hikes will also continue to put downward pressure on transaction volume. 

Economic Indicators

E-commerce will continue to create industrial demand in 2023, albeit at lower levels than seen during previous years. Online purchases will continue to grow their share of retail sales, and big-box retailers will continue to embrace digital and omnichannel sales.  

Amazon’s 2022 pullback will not be reversed this year, and consequently, there will be less demand for multimillion-square-foot distribution centers this year than during the first two years of the pandemic. However, our industrial market outlook reveals that demand for last-mile distribution facilities will grow, especially for well-located facilities in high-growth markets. 

Download the complete January 2023 report for a full picture of how U.S. industrial markets fared throughout 2022, 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 office 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. 

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Key Takeaways:

• Despite record new supply coming online in 2022, the national vacancy rate contracted another 20 basis points from the previous month 
• Strong demand also pushed national industrial in-place rent up 6.5% year-over-year to an average of $7 per square foot in November 
• Single-market vacancy dropped most in Nashville, where the average rate tightened near to 1%
• More than 742 million square feet of industrial space was under construction at the end of November 
• Nearly $79 billion in industrial sales closed year-to-date, with the average sale price up 18% from 2021 
• Inland Empire and Los Angeles were the only U.S. markets to post double-digit rent growth
• Chicago claimed the top Midwest spot for new leases signed at an average of $7.41 per square foot  
• New Jersey industrial lease spreads among the widest in the U.S.    

The industrial sector’s expansion maintained its 2022 momentum through November, as intense demand for industrial space continued to fuel dynamic rent growth. The national average rent for in-place leases reached $7.00 per square foot last month, according to the latest U.S. industrial market report from CommercialEdge.

The new development pipeline also continued to increase, undeterred by inflation-driven backlogs and bottlenecks along the supply chain. There were 742.3 million square feet of industrial space under construction at the end of November. And, despite record levels of new supply delivered in 2022, the national industrial vacancy rate contracted steadily throughout the year, reaching 3.8% in the same month. 

Rents and Occupancy: Record New Supply Can’t Keep Vacancy Rates from Falling

Industrial rent growth accelerated at a steady pace in top U.S. markets throughout the year, with national in-place rents for industrial space increasing 6.5% year-over-year. In November, the national average increased another five cents from the previous month, to reach $7.00 per square foot. 

For another consecutive month, port markets led the nation in both new leases and in-place rent growth. In line with trends observed during the previous two years, Southern California in-place rents have climbed at the fastest rate, driven by double-digit growth in the Inland Empire and Los Angeles markets. On the East Coast, Boston and New Jersey saw the strongest rent hikes. 

Average Rent by Metro

Tenants signing new leases are paying more than ever for space. The average rate of a lease signed in the last twelve months was $9.07 per square foot — $2.07 more than the average for all in-place leases. The markets with the highest premiums for new leases were in the West, where Los Angeles, the Inland Empire and Orange County dominated. Meanwhile, Nashville had the largest spreads in the South and Boston took the lead among northeastern markets. 

The national vacancy rate stood at 3.8% in November, following a decrease of 20 basis points from the previous month. While many of the supply chain issues from the beginning of 2022 eased in the second half of the year, finding suitable industrial space in port markets remains one of the biggest challenges, as vacancy rates were still tight in the Inland Empire, Los Angeles, and New Jersey. Rapidly expanding non-port markets such as Nashville and Columbus, where demand is outstripping supply, are also seeing extremely low industrial vacancy rates.  

Supply: Top Markets Dominate New Supply Pipeline

A total of 742.3 million square feet of industrial stock was under construction at the end of November, representing 4.0% of existing inventory. Moreover, data showed an additional 684.5 million square feet in the planning stages. With the national vacancy rate for the top 30 markets having dipped below 4%, space in the hottest markets is already pre-leased before delivery or, in some cases, before construction even begins. 

Industrial Space Under Construction (Million Sq. Ft)

While many markets are experiencing an industrial construction boom, much of the new supply being developed is concentrated in a handful of locations: Phoenix, Dallas - Fort Worth, the Inland Empire, Chicago and Houston account for more than a quarter of all under-construction space. Half of all under-development supply is in only 18 markets. 

Transactions: Sale Cool as Interest Rates Rise

While increasing interest rates have led to a tightening investment market in the second half of the year, year-to-date, a total of $78.8 billion in industrial sales were recorded nationally through November.

Rising interest rates have also impacted sales prices, with the average for an industrial property slipping to $127 per square foot (down 5.4%) in the third quarter and resting at $116 per square foot through the first two months of the fourth quarter. Even so, average sale prices were still well above 2021 levels, with the average sale price this year marking a 17.8% increase year-over-year. 

Year-to-Date Sales (Millions)

The leading markets in terms of industrial sales volume were Dallas, Los Angeles and the Inland Empire. These were the only markets to each surpass the $4 billion threshold year-to-date, recording a combined transaction volume of nearly $14 billion. Southern California still leads in terms of price per square foot, with year-to-date sales prices approaching $370 per square foot in one of the region’s hottest markets. 

Year-to-Date Sale Price Per Square Foot

Western Markets: The Inland Empire and Los Angeles Record Double-Digit Rent Growth 

Southern California's industrial rent growth remains firmly in the lead, with rents rising 13.8% in the Inland Empire and 10.7% in Los Angeles. The two Western markets were the only ones to record double-digit rent growth among the top 30 industrial markets CommercialEdge surveyed. But sharp rent appreciation is not limited to Southern California, as other Western regions are also experiencing a rapid rate of increase. Specifically, in-place rents for Phoenix industrial space rose 7.3% over year-ago figures, while Portland and the Bay Area gained 6.4% and 6.3%, respectively.  

As a result, Western U.S. industrial markets remain the most expensive in the country — $12.79 per square foot in Orange County, $11.91 per square foot in the Bay Area, and $11.85 per square foot for industrial space in Los Angeles. And with most Southern California markets seeing new leases signed at rates well over $10 per square foot, November saw new leases averaging $19.32 per square foot in Los Angeles, $18.06 per square foot in Orange County, and $14.50 per square foot in the Bay Area. 

Southern California markets also have some of the lowest industrial vacancy rates in the U.S., with the Inland Empire at just 1.2% — the second-lowest vacancy rate among the top 30 U.S. industrial markets. Los Angeles and Orange County had vacancy rates of 2.2% and 3.0%, respectively. Vacancy levels are expected to remain low due to demand far outstripping supply and the lack of land for sizeable industrial projects in these markets. 

Los Angeles had a little over 5 million square feet of industrial space under construction at the end of November, equal to only 0.7% of its existing stock, while planned projects are projected to add just 2.5% to the market’s inventory, resulting in a supply pipeline much behind market needs. Similarly, Orange County had a new supply pipeline of just 1.3% of its existing inventory, and the Bay Area’s under-construction pipeline accounted for just 2.4% of its stock. While construction activity is far more elevated in the Inland Empire, where nearly 30.7 million square feet of industrial space under development account for 5.0% of stock, these figures still fall short of market demand. The continued high demand indicates a buoyant industrial market outlook for Southern California in 2023.

West Regional Highlights

Elsewhere in the Western U.S., Phoenix had the largest supply pipeline on a stock basis and the second largest in terms of square footage, as industrial players pushed out of Southern California continue to flock to the Arizona market. Specifically, Phoenix had more than 52.5 million square feet of new industrial space under construction as of late November — the equivalent of 17.5% of its existing inventory. Adding planned projects to the mix more than doubled that estimate and boosts the pipeline by 36.3%. 

Meanwhile, the industrial sector has somewhat cooled in terms of sales, with the third quarter marking the first decline in the average sale price of an industrial property in two years. As of this report, the fourth quarter has seen a similar decline. However, average sale prices remained well above where they were last year.  

The highest sale prices were recorded in Southern California, with Orange County industrial properties trading for $369 per square foot, Los Angeles at $300 per square foot, and the Inland Empire at $295 per square foot.  

L.A. and the Inland Empire were also in the lead in terms of sales volume, claiming the second and third spots: Los Angeles closed $4.54 billion in industrial sales, followed by the Inland Empire with a sales volume of $4.43 billion. Industrial deals closed in Phoenix amounted to $3.1 billion. 

Midwestern Markets: Chicago Leads with Sales Volume Nearing $4B

Unlike port markets where space is limited for new projects, Midwestern markets with more generous zoning or geographic permissions, as well as a significant logistics presence, are rapidly expanding their inventory and keeping industrial rent growth moderate in the process.  

Detroit claimed the sharpest rent growth in the Midwest, with rents increasing 6.2% year-over-year, which ranked the market second-priciest for in-place industrial leases in the region at $6.13 per square foot, outpacing the Chicago rate of $5.59 per square foot. However, Chicago claimed the top spot in the Midwest for new leases with an average of $7.41 per square foot. Detroit ranked second for in-place contracts with an average rate of $6.62, followed by the Twin Cities at $6.30 per square foot. 

As for transactional activity, Chicago led the Midwest in industrial sales, with a total sales volume of $3.78 billion at the end of November. Three other markets also recorded strong sales year-to-date and surpassed the $1 billion mark: Indianapolis industrial sales totaled $1.19 billion; the Twin Cities saw sales amounting to $1.033 billion; industrial sales closed in Columbus followed close behind with a total of $1.031 billion. In addition, the Midwest competed with the South for the lowest prices per square foot, as only the Twin Cities exceeded $100 per square foot, while Chicago assets traded for an average of $87 per square foot. 

Midwest Regional Highlights

Development in Midwest markets is driven by some of the lowest vacancy rates in the country. Specifically, vacancy rates stood at 1.7% in Columbus and 2.5% in Indianapolis and Kansas City.  

Indianapolis had the second-largest construction pipeline in the region, with a total of 22.8 million square feet of industrial space underway, accounting for 6.8% of total stock in the market. Meanwhile, Columbus followed with 15.9 million square feet under construction, equal to 5.6% of local inventory. New supply in the Kansas City pipeline encompassed 11 million square feet, the equivalent of 4.2% of existing stock. When also considering planned projects, Indianapolis is looking at a 12.6% industrial market expansion, Columbus by 8.9% and Kansas City by 17.2%. 

Chicago had a vacancy rate of 4.1% at the end of November and the market led the Midwest in development activity. Chicago had more than 26 million square feet of industrial projects underway, accounting for 2.6% of its stock. Taking into account planned projects as well, the market is looking at expanding its industrial footprint by 6.3%. Among the Midwestern markets with more tempered development activity, the Twin Cities stood out for having a new supply pipeline of a little more than 6 million square feet, equal to 1.9% of its inventory. 

Southern Markets: Nashville Takes the Lead with Lowest Vacancy Rate in the U.S. 

The lowest vacancy rate among the top 30 U.S. markets we surveyed was recorded in Nashville — just 1.2% at the end of November. Atlanta, Miami, and Charlotte followed with 2.6%, 3% and 3.1%, respectively. In addition to Nashville, the latter three were the only other Southern markets to post vacancy rates below the national rate of 3.8%. On the other hand, Houston had one of the highest vacancy rates at 7.2%, both in the South and nationwide.      

In Southern markets with lower vacancies, industrial rent growth has been more robust and in line with the national average rate of 6.5%. Specifically, Atlanta led the South in terms of rate growth at 6.6%, closely followed by Nashville at 6.4% and Miami at 6.3%.

These gains also generated some of the widest lease spreads in the region, with Miami in the lead: While in-place rents averaged $9.72 per square foot here, new contracts signed over the past 12 months averaged $11.60. Nashville in-place rents stood at $5.52 per square foot, while new leases averaged $11.29 per square foot. New-lease rates in both Miami and Nashville exceeded Western markets such as Seattle and Portland, where new contracts were inked at a per-square-foot average of $10.30 and $10.18, respectively. 

The effect of higher vacancy rates in some industrial markets in the South was evident in more modest lease spreads. For example, Houston in-place rents stood at $6.15 per square foot, while new leases were signed at $6.17 per square foot. Similarly, Memphis had a 5.6% vacancy rate, a higher rate that can be correlated with the market’s lease premiums: In-place rents clocked in at $3.66 per square foot, while new leases were signed at $4.01 per square foot. Charlotte was the only outlier, with a relatively low vacancy rate (3.1%) and lower in-place rents ($6.26 per square foot) than in newly signed leases ($6.17 per square foot). 

South Regional Highlights

Dallas – Fort Worth remained home to the largest development pipeline in terms of square footage both in the South and across the country. At the end of November, the Dallas – Fort Worth market had a new supply pipeline of 62.6 million square feet, which is set to boost the market’s already massive industrial footprint by 7.3%, the highest rate among Southern markets. Moreover, planned projects that have yet to break ground are projected to increase the market’s inventory by 12.8%.  

Houston, despite having a vacancy rate above the national average, has the second-largest development pipeline in the South with more than 26 million square feet of industrial space under construction, equal to 4.7% of stock. Additionally, the market is set to increase its square footage by 7.6% if planned projects materialize. 

In fact, many markets in the region don't have to contend with space constraints that port markets are faced with, resulting in significant development pipelines outside the Dallas and Houston markets. As of late November, Charlotte had a total of 14.1 million square feet of industrial space underway, representing 4.8% of its total inventory. Atlanta wasn’t that far behind, with a new development pipeline totaling 12.4 million square feet, equal to 2.3% of its industrial stock. 

In terms of sales prices, Houston was the priciest in the region, with a rate of $133 per square foot year-to-date. Tampa followed in second place, with $125 per square foot. The rate for Atlanta industrial space averaged $108 per square foot and ranked third. At the other end of the spectrum, Memphis industrial deals averaged the lowest year-to-date sale price among leading industrial markets — $60 per square foot. 

As for sales volume, Dallas continued to lead the region — and the country. In fact, its $4.71 billion year-to-date sales volume was the largest among the top 30 markets, while Houston’s $3.85 billion sales volume placed the market fourth, according to the CommercialEdge U.S. industrial market report.

Northeastern Markets: Philadelphia Set to Increase Industrial Square Footage by 5.3% 

In line with other port markets, New Jersey's vacancy rate contracted further, coming in at 2% and falling between the Los Angeles rate of 2.2% and Orange County's 3 %.  

Given strong demand and high occupancy rates, industrial rents in New Jersey have increased consistently, rising 8.9% year-over-year — the third-fastest rent growth rate nationwide. With in-place rents averaging $9.22 per square foot and leases signed over the previous 12 months averaging $13.36 per square foot, New Jersey had one of the widest industrial lease spreads in the U.S.  

While several major markets in the South saw new leases inked at lower rates than existing contracts, rates for new leases were higher in the Northeast's most significant industrial markets. For instance, Boston in-place contracts stood at $8.87 per square foot, while new leases averaged $13.13 per square foot — the only other new-lease average in the Northeast to exceed the $10 threshold along with New Jersey. This pattern persisted even in Philadelphia, where both new and existing leases stood below the national average. 

Northeast Regional Highlights

New Jersey’s $2.95 billion transaction volume, the seventh highest in the country, placed it at the forefront of Northeast markets. However, the year-to-date sales price of $175 per square foot here could not compete with the West's more vertical pricing. At $179 per square foot, Boston was home to the highest year-to-date sale price in the Northeast. However, Boston's $1.74 billion in industrial sales was exceeded by the $2.6 billion worth of Philadelphia industrial sales, which averaged $122 per square foot. 

Philadelphia led the Northeast in terms of new supply — the Pennsylvania market stood out with a 21.5 million-square-foot supply pipeline that accounted for 5.3% of total local stock. Considering planned projects, Philadelphia is looking at a market expansion of 13.3%, the third-largest growth rate among the markets we surveyed for this industrial property market report. Meanwhile, New Jersey had the second-largest new supply pipeline in the Northeast (13.2 million square feet), followed by Boston (6.5 million square feet) and Baltimore (4.8 million square feet). 

Economic Indicators: E-Commerce Share of Retail Sales on the Rise Again  

E-commerce sales continued to expand in the third quarter, according to the U.S. Census Bureau. There were $265.9 billion in e-commerce sales, which represented an increase of 3% quarter-over-quarter and 10.8% year-over-year.  

During the last four quarters, e-commerce sales amounted to more than $1 trillion. In the third quarter of 2022, e-commerce accounted for 18% of core retail sales (which excludes motor vehicles, their parts and gasoline) — a number that is roughly on par with the pre-COVID-19 trendline. 

Economic Indicators

In 2020, many believed that the pandemic had permanently shifted the e-commerce share of retail sales ahead by two to three years. However, that share began to fall as vaccines became available and businesses could gradually open again. After peaking at 20% in Q2 2020 (up from 14.2% in Q1), the share fell in five of six ensuing quarters, bottoming out at 17.6% in Q4 2021. Since then, e-commerce’s portion of core retail sales has slowly been on the rise again. 

Quarterly E-Commerce Sales

Trends & Industry News: E-Commerce Continues to Propel the Industrial Sector

The 2020 e-commerce boom transformed the industrial market. As businesses have spent the last two years attempting to adapt to skyrocketing internet sales, its effects are still being felt today. The third quarter of this year saw an increase in e-commerce sales of 66.4% when compared to the first quarter of 2020, according to the U.S. Census Bureau. 

While recent quarters have seen a return to normal in e-commerce sales growth, supply networks have yet to fully recover from the shock of the pandemic. One of the main causes of inflation was backlogs and bottlenecks in the supply chain, and even as these pressures are subsiding, finding industrial space in key locations will remain challenging, industrial property outlooks show.

Amazon, anticipating that the e-commerce boom would continue, swiftly expanded in 2021 but scaled back this year after acknowledging it had been expanding too aggressively. The e-commerce giant has spent the second half of 2022 pausing projects, slowing hiring and subleasing space. Amazon also has big box retailers like Target and Walmart to contend with now. These companies were forced to play catch-up to Amazon when the pandemic hit and have since been attempting to leverage their physical footprints to do so. Both retailers have expanded delivery and in-person pick-up options and have begun using their stores as last-mile delivery centers. 

Data around the holiday shopping season has been mixed — Adobe Analytics reported record levels of online sales for Black Friday and Cyber Monday, but retail sales were down 0.6% in the month of November according to the U.S. Census Bureau. 

National New Supply Forecast (Square Feet)

CommercialEdge's industrial market outlook projects that, while it may not reach levels seen in 2020 again, e-commerce growth will continue to drive high levels of demand in the industrial sector for the foreseeable future. New supply has yet to meet demand, and even a potential recession is unlikely to cause e-commerce sales volume to fall. 

Download the complete December 2022 report for a full picture of how U.S. industrial markets fared in the first 11 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. For a detailed methodology, download the full report using the link provided above.

The post Despite Record New Supply, National Industrial Vacancy Dips Below 4%  appeared first on CommercialEdge.

• National industrial in-place rents averaged $6.95 per square foot, up 5.8% over year-ago figures as demand remains strong
• The national vacancy rate contracted 10 basis points compared to the previous month as new deliveries were absorbed at a rapid pace
• Nearly 714 million square feet of industrial space was under construction at the end of October, despite Amazon’s pullback from its aggressive expansion policy
• The national price per square foot remained unchanged month-over-month, while the year-to-date sales volume increased by $6.5 billion
• The Western U.S. claimed the six most expensive markets in terms of sales prices
• Increasing interest in Detroit results in the sharpest rent growth in the Midwest at 6.2%
• Dallas’ market expansion showed no signs of slowing, with local development pipeline nearing 67 million square feet
• The New Jersey sales volume remained strong in Q3, nearing $3 billion year-to-date

The new development pipeline continued to expand in the third quarter despite the headwinds of increasing financing costs and general economic uncertainty, signaling that demand for space continues to outstrip the pace of new deliveries. There were 713.6 million square feet of industrial space under construction at the end of October, representing 4.0% of stock.

Additionally, nearly 350 million square feet have already been delivered this year, reaching historic levels. Despite this, the national vacancy rate stood at 4% in October, following a steadily decreasing trend throughout the year.

The construction pipeline volume is tremendous, however, with vacancy rates still hovering around 4% nationally, there continues to be an appetite for that space to be delivered. It does seem likely the rate of construction backs off this current record pace getting into 2023 though.

Peter Kolaczynski, Operations Senior Manager

Rents and Occupancy: Port Markets Continue to Lead the Pack

Industrial rents have continued to grow in the country’s top markets throughout the year, with the national in-place rents for industrial space averaging $6.95 per square foot in October. That represented a 5.8% year-over-year increase and a seven-cent uptick over September figures.

Port markets continued to lead the country both in terms of in-place rent growth, as well as new leases. As has been the case over the past two years, in-place rents have grown at the sharpest rate in Southern California, led by the Inland Empire’s double-digit price increase. On the Eastern seaboard, Boston and New Jersey experienced robust rent growth and demand here is expected to increase further.

Average Rent by Metro

Premiums paid by tenants for new leases also continued to grow over the last year: new contracts now cost $1.54 more per square foot than the national average for all leases. The largest spreads were, of course, in already costly port markets with little space for further expansion: Los Angeles, the Inland Empire, Orange County, and New Jersey.

The national vacancy rate stood at 4.0% in October, which marked a decrease of 10 basis points from the previous month. Vacancy rates generally remained lowest in port markets as well, but non-port markets with a heavy logistics presence also continued to contend with low levels of available space. Among those, Atlanta, Nashville, Indianapolis, Columbus, and Kansas City had vacancy rates lower than 3%.

Supply: Industrial Starts Continue at Robust Pace, Despite Amazon Pullback

A total of 713.6 million square feet of industrial space was under construction at the end of October, representing 4.0% of the existing national stock. Projects currently in the planning stages are expected to add a nearly equal amount of space. Shipping, logistics and chip manufacturing are driving much of the industrial space construction throughout the U.S.

In 2021, seven Amazon distribution centers larger than two million square feet started construction across the country. But earlier this year the company admitted that their expansion had been overzealous, and only broke ground on three projects. Despite the retail giant’s pullback, shipping and logistics account for half of the 20 largest industrial projects under construction.

Industrial Space Under Construction (Million Sq. Ft)

The vital semiconductor sector is also a notable driver of industrial space development, especially in terms of manufacturing space, with a significant boost from recent legislative efforts to reshore production of key industries. This sector is also represented in some of the country’s 20 largest industrial projects currently under way.

Transactions: Southern California Sale Prices Still Outpace Rest of the Country by Wide Margins

Nationally, there were $71.9 billion in industrial sales recorded during the first 10 months of the year. Although the sales volume for the first two quarters of this year was ahead of 2021 — a record-setting year itself — sales slowed in the second half of this year. With the Federal Reserve hiking the rates by 75 basis points multiple times, the transactions market has cooled as capital gets more expensive and deals become tougher to pencil out. However, in spite of increasing rates and general economic uncertainty, investors are still looking to buy well positioned assets.

Year-to-Date Sales (Millions)

Los Angeles, the Inland Empire and Dallas all closed more than $4 billion in industrial deals year-to-date, totaling nearly $17 billion across the three leading industrial markets in terms of transactional activity.

In terms of price per square foot, however, Southern California still leads, with year-to-date sales prices even surpassing $350 per square foot in its hottest market.

Year-to-Date Sale Price Per Square Foot

Western Markets: Region is Home to Six of the Top 10 Priciest U.S. Markets

With Southern California’s tight vacancies, high lease prices and robust rent growth, the industrial sector has been consistently outperforming all other industrial markets. Orange County’s year-to-date price rested at $360 per square foot, followed by the Inland Empire at $301 per square foot, and Los Angeles close behind at $297 per square foot. Los Angeles and the Inland Empire also had the largest sales volumes year-to-date — $4.37 billion and $4.06 billion, respectively.

But transactional activity has been significantly more muted in Orange County, where industrial sales amounted to $1 billion so far this year, placing the OC between the sales totals of Columbus and Indianapolis. In fact, while the West was home to some of the largest sales volume markets in the country, it was also home to two of the quietest markets in terms of transactions. Specifically, the Central Valley and Portland closed only $549 million and $527 million, respectively, in industrial deals year-to-date.

The Bay Area and Seattle stood between the two extremes in terms of sales volume but had the next-highest prices per square foot at $236 and $235, respectively. Moreover, Phoenix was the only other market to surpass the $200 per square foot sales price threshold nationwide, meaning that the country’s six most expensive markets in terms of sales prices are currently all located in the West.

Furthermore, the sharpest rent increases were also here: In fact, the Inland Empire was the only market where rent-growth reached into double-digit category, with local rates shooting up 11.6% over the past 12 months. Los Angeles was close behind though, with October leases inked at rates 9.7% over year-ago figures.

West Regional Highlights

Although the next-sharpest rate increase took place in Boston, the following two were Western markets again with both Orange County and Phoenix lease rates growing 7.6% year-over-year. Rent growth in Phoenix has been driven by the market taking on spillover demand from the Ports of Los Angeles and Long Beach that Southern California cannot handle. And while new leases averaged $1.54 more per square foot nationally than in-place leases, the largest spreads were in Los Angeles ($6.10 more per square foot), the Inland Empire ($5.60) and Orange County ($4.17).

In terms of vacancies, the Inland Empire remained the tightest market as has been the case for several quarters now, closing October with a mere 1% vacancy rate. The Central Valley, Los Angeles and Phoenix posted vacancies between 2% and 3%, with all other markets remaining less than 6.5% vacant.

Phoenix, of course, still had the largest supply pipeline on a stock basis and the second largest in terms of square footage, as it continues to attract those squeezed out of Southern California. To be precise, Phoenix closed October with 46.6 million square feet of industrial space under construction that will increase its existing industrial square footage by 15.6%, with another 18.3% in the planning stages.

At the same time, the Inland Empire had the fifth-largest construction pipeline on a percentage-of-stock basis, currently developing the equivalent of 5.6% of its existing stock: 34.5 million square feet. When also counting planned developments, the country’s tightest industrial market may add a total of 9.9% of its existing stock. Conversely, Portland and Los Angeles had some of the most modest construction pipelines among the country’s leading markets: just 0.8% and 0.7% of their respective stocks.

Midwestern Markets: Detroit Leads Regional Rent Growth

In the Midwest, markets with heavy logistics presences and no geographic or zoning constraints for development are adding space at a rapid pace. In fact, Indianapolis and Columbus have the third and fourth largest construction pipelines, with the equivalent of 7.4% and 5.9% of their respective stocks currently being developed.

These efforts will add 24 million square feet of space to the Indianapolis industrial market and 16.7 million square feet in Columbus. When taking into account planned projects as well, Indianapolis is looking at an increase of 12.6% of its current square footage, while stock in Columbus might increase by 9.1%. At the same time, when projects currently under construction are delivered and if all planned developments materialize, Kansas City could increase its industrial footprint by an impressive 18.6%.

Developments in these Midwest markets are driven by some of the lowest vacancy rates in the country. Specifically, vacancy rates stood at 2.7% in Kansas City, 2.5% in Indianapolis and 1.6% in Columbus.

Midwest Regional Highlights

But, unlike port markets where space is tight for new projects, all three Midwestern markets maintained rent growth at no more than 3.4% over the past 12 months, with Kansas City increasing rates by just 2.7% year-over-year. In fact, leases signed in Kansas City over the past 12 months averaged $3.95 per square foot, lower than the $4.55 per square foot average for in-place contracts.

Notably, the sharpest rent growth in the Midwest was claimed by Detroit, where October rents were up 6.2% year-over-year, making Detroit the second-priciest market for industrial leases in the Midwest at $6.15 per square foot. As a result, it outpaced Chicago, which recorded a rent rate of $5.59 per square foot.

As for transactional activity, the only market to surpass $1 billion in industrial sales year-to-date was Columbus at $1.02 billion. However, Indianapolis might also soon surpass that threshold, totaling $993 million so far this year. At $850 million, Detroit had the region’s third largest sales volume year-to-date. The Midwest also contended with the South for some of the lowest prices per square foot, as only the Twin Cities surpassed $100 per square foot, while Detroit assets traded for an average of $66 per square foot.

Southern Markets:  Dallas Further Increases Construction Pipeline to Nearly 67 Million Square Feet

Similarly to logistics hubs in the Midwest, markets in the South with a large logistics sector are also contending with low vacancy rates. Among those are Nashville and Atlanta, which saw vacancy rates of 1.4% and 2.3% respectively. But the South was also the setting for some of the highest industrial vacancies in the U.S., with Houston closing October at 7.6% vacancy.

Despite this, Houston has 25 million square feet of new industrial space under construction, which will increase its existing stock by 4.5%. Furthermore, if all planned projects materialize, the city may see an increase in industrial space of 7.6%.

But Houston isn’t the only industrial market in the South pushing for significant space expansions, as many of the markets in the region do not have to contend with the space constraints that port markets, for example, have to face. Although Charlotte’s 15.5 million square-foot construction pipeline represents a smaller footprint than that of Atlanta, on a percentage-of-stock basis, it represents a 5.3% increase for Charlotte’s industrial stock.

Of course, the South’s — and the country’s — largest development pipeline in terms of square footage remains the expansion of the Dallas – Fort Worth market. Last month, the Dallas market had 62 million square feet of industrial space under construction, which has since further increased to reach 66.7 million square feet. While the market’s current construction pipeline is set to boost its industrial footprint by 7.8%, stock planned for the market that has yet to break ground could bring that increase as high as 13.1%.

South Regional Highlights

Despite this vast new supply pipeline, Dallas – Fort Worth tied with Miami for the South’s sharpest rent growth at 6% year-over-year. For the Dallas market that meant an average rent of $5.15 per square foot, with leases signed over the past 12 months averaging $6.12 per square foot. In Miami though, that 6% year-over-year increase resulted in the region’s widest lease spread at $2.33 per square foot. Specifically, the average industrial rent in Miami stood at $9.57 per square foot in October — the South’s priciest — while leases signed in the past year averaged $11.90 per square foot.

As for sales prices, Nashville led the region at a rate of $152 per square foot year-to-date, followed by Tampa with a rate of $128 per square foot and Atlanta with $117 per square foot. On the other end of the spectrum stood Memphis, which sported the lowest year-to-date sale price among the country’s leading industrial markets — $60 per square foot.

And while Dallas stood approximately midway between the region’s lowest and highest price per square foot, it remained the region’s leader in terms of sales volume. In fact, its $4.05 billion year-to-date sales volume was the third largest in the country. Houston was next with $3.69 billion in industrial sales, followed by Atlanta, where sales totaled $1.82 billion.

Northeastern Markets: Smaller Sales Drive New Jersey Volume

As port markets continued to log the sharpest rent increases in the country, Boston’s rents have grown 8.9% and the New Jersey market has seen 7.2% growth, resulting in average rates of $9.03 per square foot in both markets. New Jersey is especially primed for further rent growth as new lease premiums here reached $3.32 per square foot.

Moreover, demand is expected to increase even further especially as the Port of New York and New Jersey became this busiest in the nation by number of containers handled. This shift is expected to further fuel demand for industrial space in the region, not only in New Jersey, but also spilling out into the markets of Allentown-Bethlehem and Scranton-Wilkes-Barre.

Northeast Regional Highlights

New Jersey was also one of the few markets where total sales volume did not fall year-over-year in the third quarter. Unlike other markets with comparable volume, New Jersey is not boosted by massive transaction figures from a few properties, but rather has seen numerous sales of smaller properties. The median sale price in the market is $10.1 million over more than 150 transactions.

New Jersey’s sales volume thus reached $2.87 billion year-to-date — the seventh highest in the country — but its $176 per square foot year-to-date sales price could not contend with the West’s more vertical pricing. At $180 per square foot, Boston’s year-to-date sale price was the highest in the Northeast. However, Boston’s $1.7 billion sales volume was outpaced by Philadelphia’s $2.53 billion, which it reached with an average $124 price per square foot.

Philadelphia also stood out in terms of new supply, with 16.7 million square feet of industrial space under construction at the end of October, which will increase its existing footprint by 4.1%. As a result, Philadelphia had the largest development pipeline in the Northeast, followed by New Jersey with 13 million square feet. Boston and Baltimore had less than half of that, totaling 6.1 million square feet and 5.3 million square feet under construction, respectively.

Economic Indicators: Warehousing Employment Falls in Second Half of Year

A pandemic-driven boom in e-commerce spending caused employment in the warehousing and storage sector of the labor market to surge for two years. However, since this summer, the number of jobs in the sector has fallen, with October being the fourth consecutive month of job losses. There were 20,000 fewer warehousing and storage jobs in October than in September, marking a monthly decline of 1.1%. The sector has lost 49,000 jobs since June, a rapid turnaround after growing at least 9% year-over-year during the previous 24 months.

Economic Indicators

Amazon — by far the largest employer in the warehousing and storage sector — has abandoned or delayed the opening of multiple distributions facilities across the country, and admitted in earnings calls earlier this year that it hired too many fulfillment center workers in 2021. The high turnover rate of workers in Amazon warehouses, reported to be around 100% per year, means that a hiring slowdown by the company could be causing the drop in the sector, simply through attrition of their workforce.

Warehousing and Storage Employment

Trends & Industry News: Cautious Optimism as Year Winds Down

In the face of rising interest rates leading to more volatile capital markets, flattening e-commerce sales growth, and Amazon pausing the rapid expansion that dominated the sector in recent years, the industrial sector remains on solid footing as we head into 2023.

The largest logistics providers in the nation paint a picture of cautious optimism for the logistics sector in recent earnings calls and research reports. Link Logistics, the logistics arm of Blackstone, is seeing “healthy, broad-based demand” and said that during the third quarter its same-store portfolio was 97.4% leased. Despite economic uncertainty, Link indicated that its real time data and insights from their platform provide “conviction in the favorable outlook for the logistics sector.”

Prologis’s Industrial Business Indicator research report forecasts that the frantic pace of logistics leases will normalize in coming months. Although Prologis stated in their recent earnings call that they will slow speculative projects and favor developments with committed tenants, deliveries for the industrial sector will remain historically elevated at least through 2024. For a sector that has run hot for more than two years now, increased deliveries combined with the “slightly lower net absorption” in logistics forecasted by Prologis Research could bring more sustainable growth to industrial real estate.

National New Supply Forecast (Square Feet)

CommercialEdge expects that demand for industrial space will remain strong in coming years, although it is unlikely that the torrid pace at which the sector grew during the pandemic will be seen again. While the rapid growth of e-commerce and logistics may taper off, the slack could be picked up by reshored manufacturing.

Numerous semiconductor plants were underway when 2022 began, and the passage of the CHIPS and Science Act, which includes billions in incentives for chip manufacturing, will stimulate further investment in semiconductors. Because they are a critical component in the production of countless goods — from washing machines and automobiles to smartphones and medical equipment — expanded chip manufacturing is a vital first step in a reshoring movement.

Download the complete November 2022 report for a full picture of how U.S. industrial markets fared in the first eight 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. For a detailed methodology, download the full report using the link provided above.

The post Driven by Shipping and Logistics, National Development Pipeline Nears 714 Million Square Feet appeared first on CommercialEdge.

• High demand continues to push prices up in the industrial sector, with September in-place rents nearly 6% over year-ago figures
• National vacancy rate rests at 4.1% for second consecutive month with occupier demand unlikely to weaken
• With shrinking amounts of available industrial space nationally, 703 million square feet of new supply was under construction at the end of September
• Although sale prices cooled in some markets during Q3, industrial assets are still trading for 54% more than in 2020
• Under construction and planned projects to increase Phoenix industrial footprint by 32% due to unrelenting overflow from Southern California
• Despite rivaling So-Cal vacancies, Indianapolis and Columbus keep industrial rent growth at 3% with sustained deliveries
• Under construction industrial projects reach 62 million square feet in Dallas-Fort Worth as market leverages lack of geographic limitations to satisfy demand

Industrial space remains in high demand, leading tenants to pay increasingly higher prices for a shrinking amount of available space. The national average rent for in-place leases stood at $6.88 per square foot, growing 5.8% over the last year. While rents are climbing and vacancies falling virtually everywhere, markets adjacent to ports with a lack of land to build new supply are seeing the most extreme trends.

“Especially in Southern California and around the port in New Jersey, very low vacancy, a limited new supply pipeline and steady demand are justifying the premiums new leases are garnering. Less so in the Midwest where supply pipelines represent a greater percentage of existing inventory.”

Peter Kolaczynski, Operations Senior Manager

Geographical constraints are preventing many of the hottest markets from adding sufficient new space. But markets unhindered by such limitations are taking advantage of unmet demand with impressive new supply pipelines, such as the 62 million square feet of industrial space currently being built in Dallas – Fort Worth.

Rents, Occupancy & Supply: New Supply Keeps Rent Growth Down in Non-Port Markets

Although some markets have managed to keep rent growth at more modest levels with large pipelines of new deliveries, nationwide demand continues to outstrip supply, leading to continued rent growth. Thus, while national in-place rents for industrial space reached $6.88 per square foot, new leases cost $1.38 more per square foot than in-place contracts, averaging $8.26 per square foot.

Average Rent by Metro

Although most markets saw tenants pay premiums for new space, in some locations the difference between all leases and new leases was negligible. Most of these markets were far removed from busy ports and have large supply pipelines as a percentage of existing stock. Denver, St. Louis, Kansas City, Houston and Memphis all had an average rate for new leases slightly below the market average for in-place leases, influenced by above-average vacancy rates, high levels of new supply delivered recently or in the pipeline.

Industrial Space Under Construction (Million Sq. Ft)

The national vacancy rate in September was 4.1%, unchanged from the previous month. Despite economic uncertainty, industrial space continues to be in high demand and no letup from occupiers appears to be in sight, continuing to fuel the nationwide boom in industrial development, although some industry experts are concerned about the possibility of overbuilding.

National Industrial Pipeline

Specifically, a total of 703.0 million square feet of industrial stock was under construction nationally, representing 4.0% of stock, with an additional 650.3 million square feet in the planning stages.

Across the 50 most important industrial markets in the U.S., none have more industrial supply under construction on a percentage-of-stock basis than Phoenix, and only Dallas has more square feet being built on an absolute basis.

Transactions: Pricing Cools Slightly in Third Quarter Bringing Year-to-Date Rate to $128/ Sq. Ft

Although pricing cooled in some markets during Q3, it also must be noted that given the current economic climate and considering the record transaction volume year of 2021, a Y-o-Y pullback in total volume was to be expected.

Year-to-Date Sale Price Per Square Foot

Thus, after seven straight quarters of increases in the average sale price of an industrial property, prices slightly decreased in the third quarter, falling to $127 per square foot from $136 in the second quarter. Rising interest rates, inflation and other economic headwinds have dampened the transactions market. Despite the decrease in the quarter, prices have increased 15.5% over the last year and 53.9% over the last two years. As a result, the average sale price of an industrial building year-to-date stands at $128 per square foot, with the national sales volume for the first three quarters of the year at $65.4 billion.

Quarterly Transactions (Billions)

Of the top 30 markets covered by CommercialEdge, half saw prices slip in the third quarter from the second. For example, the average sale price in Baltimore fell 40% in the third quarter and Tampa had a 30% quarterly decline. But not every market saw declines in sale prices in the third quarter: Atlanta, for instance, underwent an increase of 41% in the third quarter.

Western Markets: Under Construction and Planned Industrial Projects Could Increase Phoenix Local Stock by 32%

Southern California continues its unshakeable leadership of industrial rent growth, with both the Inland Empire and Los Angeles appreciating more than 9% year-over-year and Orange County rents rising 7.1%. But it’s not just Southern California that continues to see a rapid pace of rent growth — Western markets in general continue to post some of the highest industrial rent increases. Specifically, Phoenix in-place rents appreciated 7.5% over year-ago figures, while the Bay Area and Seattle gained 6.3%.

Consequently, industrial markets in the Western U.S. remain the priciest nationwide, with many seeing new leases inked at rates over $10 per square foot. At $12.65 per square foot and $11.49 per square foot, Orange County and Los Angeles in-place rents were among the three highest nationwide. Combined with the rapid pace of rent growth, new leases are now averaging $17.36 per square foot in Orange County and $17.39 per square foot in Los Angeles, for the widest lease spreads among the top 30 industrial markets in the country.

These markets also have some of the lowest vacancy rates in the U.S., with the Inland Empire at just 1.1%, Central Valley at 1.9% and Los Angeles at 2.0%. Moreover, the expectation for these markets is that vacancy rates will remain tight for the foreseeable future due to demand far outstripping supply, compounded by the lack of land for significant industrial developments.

For instance, Los Angeles had a mere 2 million square feet of industrial space under construction at the end of Q3, accounting for 0.3% of its existing stock. Even when taking into account planned projects, L.A. is expected to increase its footprint by just 2.2%, resulting in a supply pipeline far below what the market continues to demand. Similarly, Orange County had an under-construction pipeline of just 1.8% of its existing inventory. And while deliveries and new starts are significantly larger in the Inland Empire, they still far short of market needs.

West Regional Highlights

On the other hand, Phoenix currently has the largest supply pipeline on a stock basis and the second largest in terms of square footage, as it continues to attract an increasing number of industrial players squeezed out of Southern California. To be precise, Phoenix had nearly 45 million square feet of new industrial space under construction as of late September, the equivalent of 15.1% of its existing stock. Moreover, the market’s planned projects could more than double that pipeline for a full increase of 31.7%.

However, the industrial sector overall cooled somewhat in Q3, with sale prices lower than Q2 levels in about half of the country’s leading markets. Among them was Central Valley where Q3 sale prices were 30% lower than Q2 figures. On the other hand, the Bay Area’s industrial sector saw sales average 40% higher rates quarter-over-quarter.

Southern California claimed the highest sale prices, with Orange County industrial properties trading at $362.06 per square foot, Los Angeles at $305.54 per square foot and the Inland Empire at $303.42 per square foot. The two latter markets also remained in the lead in terms of sales volumes. Specifically, the Inland Empire closed $3.89 billion in industrial sales, followed by Los Angeles with a sales volume of $3.82 billion. Additionally, Phoenix closed $2.1 billion in industrial transactions.

Midwestern Markets: Robust New Construction Pipeline Keeps Midwest Rent Growth Down Despite Tight Vacancies

Although several Midwestern markets are also facing tight vacancy rates, rent growth has been more muted than on the West Coast or in port markets like New Jersey. Columbus and Indianapolis both experienced a 3.0% year-over-year increase in industrial rents, despite low vacancy rates that rival Californian markets. Specifically, Columbus had a 1.9% vacancy rate, the same as Central Valley, while Indianapolis vacancies stood at 2.3%, just over Los Angeles’ 2.0% rate.  By comparison, Central Valley leases rose 4.8% year-over-year, while Los Angeles shot up 9.1%.

In terms of rent growth, the attention Detroit has been receiving of late resulted in a 7.0% year-over-year lease rate increase, nearly equaling Orange County’s 7.1% gains. Thus, Detroit was at the lead of rent growth in the Midwest, and posted the widest lease spread in the region, with in-place rents averaging $6.10 per square foot and new leases signed at average rate of $6.97 per square foot.

As a result, Detroit posted the second-highest lease rate in the Midwest, surpassing Chicago’s $5.51 rate. Moreover, Detroit came close to equaling the Twin Cities’ $6.14 per square foot rate, the Midwest’s highest. But while Detroit and the Twin Cities had under-construction pipelines of 0.8% and 1.8%, respectively, Columbus and Indianapolis kept rent growth at a much lower level than West Coast markets with similar vacancy rates thanks to large new development deliveries and pipelines.

To be precise, Columbus had close to 18 million square feet of industrial space under construction, the equivalent of 6.4% of its existing footprint. When taking into account planned projects as well, Columbus is looking at a stock increase of 9.6%. Indianapolis had an even more robust construction pipeline at nearly 25 million square feet, the equivalent of 7.6% of local stock. When considering planned projects as well, the Indianapolis industrial sector is set to expand its footprint by 13.4%.

And although Kansas City was building 12 million square feet of new space for a 4.6% increase of its industrial square footage, planned projects are set to lift that figure to 17.9% of existing stock.

Midwest Regional Highlights

Chicago’s industrial market stood out when it came to sales, ranking as the only Midwestern market with a sales volume larger than $1 billion, closing $2.73 billion in industrial sales over the course of the first three quarters of the year. Additionally, Chicago had the highest number of industrial transactions among the country’s 30 leading markets, closing 275 deals by the end of September, surpassing Los Angeles’ 151 deals.

However, Chicago’s $84.59 per square foot average sale price was only the second highest in the Midwest, surpassed by the Twin Cities at $105.74 per square foot. Columbus also stood out regionally in terms of transactional activity with the second-highest sales volume at $908 million, suggesting it may very well go north of $1 billion before the year is out. The market also posted the region’s third-highest sales price at $81.45 per square foot.

Southern Markets: Dallas – Fort Worth on Track to Add 62 Million Square Feet of New Industrial Space

Among leading Southern markets, Nashville posted the lowest vacancy rate at the end of Q3 with just 1.6%. It was followed by Atlanta at 2.3% and Miami at 3.3%, with all three markets comfortably below the 4.1% national average. Conversely, Houston had one of the highest vacancy rates at 7.8%, both in the South, and nationwide.

In line with these markets’ higher vacancies, rent growth has been slower than in other markets in this region. Specifically, Houston and Memphis saw lease rates gain 2.0% over year-ago figures, while Tampa rents inched up 2.2% year-over-year. Rent growth was more robust in Miami, Atlanta and Dallas – Fort Worth, where rates increased 5.2%, 5.5% and 5.7%, respectively.

These gains resulted in some of the widest lease spreads in the region as well, with Miami in the lead: While in-place rents averaged $9.43 per square foot here, leases signed over the past 12 months averaged $11.30. Tampa’s in-place rents clocked in at an average $6.62 per square foot, while new leases came in at $7.87 per square foot. The Dallas - Fort Worth industrial sector was next, as in-place rents stood at an average $5.15 per square foot and new leases signed at $6.11 per square foot.

Conversely, some industrial markets in the South saw new leases average lower rates than in-place rents. Among them was Charlotte, where in-place industrial leases stood at $6.37 per square foot, while leases signed over the past 12 months averaged $6.09 per square foot. Houston’s high vacancy rate was also evidenced in its lease spread, with new rents averaging $5.74 per square foot while in-place contracts stood at $6.01 per square foot.

South Regional Highlights

Construction activity was fairly modest in Tampa and Atlanta on a percentage-of-stock basis: Tampa’s under-construction projects totaled 2.6% of its existing stock, while Atlanta’s industrial developments with shovel in the ground were set to increase the local stock by 2.7%.

On the other end of the spectrum stood Dallas - Fort Worth with 62 million square feet of industrial space under construction as of late September, accounting for 7.3% of the market’s stock. As a result, the Dallas market was at the forefront of industrial development in terms of square footage, with Phoenix’s 45 million-square-foot pipeline the next largest. When considering planned projects as well, Dallas is set to increase its footprint by 11.9%, the same rate as Charlotte under-construction and planned industrial pipeline.

Among Southern markets, Houston and Atlanta had the most robust sales volumes, closing $1.42 billion and $1.33 billion in sales year-to-date, respectively. Atlanta also had the most active transactional market, closing 111 deals in the first nine months of the year, ranking fifth nationwide.

In terms of pricing, Houston led the South at $164 per square foot year-to-date, followed by Nashville at $157 per square foot and Atlanta’s $113 per square foot. Atlanta was also among markets where Q3 sales prices were significantly higher than Q2 figures, coming in 40% higher.

Northeastern Markets: East Coast Construction Pipeline Struggles to Meet Demand

As has been the case across port markets, New Jersey’s vacancy rate remained tight a 2.5%, placing it between Los Angeles’ 2.0% and Orange County’s 2.7% rate. Considering the market’s high occupancy rate and demand, industrial rents in New Jersey have continued to rise, coming in 7.6% over year-ago figures, for the fourth-fastest pace of increase nationwide. That also meant that New Jersey had one of the widest industrial lease spreads nationwide, with in-place rents averaging $8.97 per square foot, while leases inked over the past 12 months averaged $11.60 per square foot.

While some leading markets in the South saw new leases signed at lower rates than in-place contracts, in the Northeast’s most important industrial markets rates for new leases were higher than in-place ones. In Boston, for example, in-place contracts averaged $9.25 per square foot, while new leases stood at $10.36 per square foot. Baltimore’s spread was also north of $1 per square foot, with the average in-place rent at $7.06 per square foot and new leases at $8.38. This trend held true even in Philadelphia, where both existing and new leases stood below the national average.

Northeast Regional Highlights

As remains the case in California’s leading industrial markets, new supply simply cannot keep up with demand in New Jersey either. The East Coast’s tightest industrial market had close to 16 million square feet of new space under construction, the equivalent of 2.9% of existing stock, and even with planned developments that have yet to break ground, New Jersey is set to increase its industrial footprint by just 5.0%, nowhere near enough to meet the demands placed on this market.

In fact, the East Coast’s most important industrial markets all had construction pipelines lower than the national average of 4.0%, with Philadelphia’s the highest on a percentage-of-stock basis at 3.4% and the Bridgeport – New Haven market the lowest at just 1.1%. Even when considering planned projects, the only market to go over the national average of 7.7% was Philadelphia, where developments that have yet to break ground and those already underway are set to increase the market’s footprint by 12.1%, for the third-highest share nationally.

In terms of sales, New Jersey remained in the lead with a year-to-date rate of $174.76 per square foot, closely followed by Boston’s $174.08 per square foot rate. New Jersey also had the third most active sales market across the country’s top 30 markets, closing 136 deals year-to-date, with Philadelphia right on its heels with 127 closed transactions. New Jersey and Philadelphia also posted the fourth- and fifth-largest industrial sales volumes, closing $2.44 billion and $2.14 billion in industrial sales year-to-date.

Economic Indicators: E-commerce Deceleration Continues

The Producer Price Index (PPI), which measures supply-side inflation faced by the producers of both goods and services, grew at a monthly rate of 0.4% and 8.5% on a 12-month basis. Core PPI, which excludes volatile food and energy prices increased 0.4% on the month and 5.6% over the last twelve months. Goods prices, driven by a 1.2% increase in the cost of food, rose 0.4% on the month and 11.3% year-over-year. Services grew at a monthly rate of 0.4% and an annual rate of 6.8%.

Economic Indicators

Inflationary pressures have eased in the second half of the year, but inflation remains well above the Federal Reserve’s target. The Fed has increased interest rates 75 basis points on two separate occasions in 2022 and recent inflation readings suggest a third such hike in November is likely. We are already seeing the impact of higher interest rates on the transactions market, with average prices and total sales volume slowing in the third quarter. A higher cost of capital may also constrain the new supply pipeline, despite continued demand for space.

Producer Price Index:

Download the complete October 2022 report for a full picture of how U.S. industrial markets fared in the first eight 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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above.

The post Sustained Demand and Insufficient New Supply Drive Lease Premiums to New Highs in Port Markets appeared first on CommercialEdge.

• The average U.S. in-place rent stood at $6.64 per square foot, up 5.5% year-over-year
• Down 30 basis points month-over-month, the national vacancy rate rested at 4.1%
• 703.5 million square feet of new industrial space was under construction at the end of August
• The national industrial sales volume totaled $57.6 billion in the first eight months of the year

Reshoring to Slowly Reshape Industrial

In recent years, U.S. manufacturers have become well acquainted with the risks involved in making goods abroad. Not only did the pandemic stress supply chains but other risks posed by U.S. tensions with China over Taiwan, the war in Ukraine and climate change all can jeopardize a firm’s operations. Consequently, many businesses are exploring reshoring production of goods to the U.S. The semiconductor industry is already beginning the process, which will facilitate further U.S. manufacturing, since semiconductors are critical components of countless products.

While some companies were already building semiconductors stateside, the CHIPS Act passed by Congress and signed into law by President Biden this summer will allocate $53 billion in funding to support domestic semiconductor manufacturing. Beyond chip manufacture, the Biden administration has committed billions to increase domestic supply-chain resiliency, and the Inflation Reduction Act incentivizes stateside production of renewable energy products, further boosting the long-term outlook of U.S. manufacturing.

After decades of decline, manufacturing employment in the U.S. began to slowly recover coming out of the Great Financial Crisis. Data from the Bureau of Labor Statistics shows the economy adding more than 1.3 million jobs in the manufacturing sector between 2010 and 2020. However, that growth was waning and the sector was seeing minor declines even before the pandemic.

As global supply chains have become stressed while the world rebounds from the pandemic, manufacturing employment growth has picked up pace, and there are more workers in the manufacturing sector now than at any point since 2008. The sector’s employment growth has been higher than 3% year-over-year every month in 2022, a pace that had not been reached since November of 1984.

Understanding that production and supply chains are complex systems that do not change overnight, we are looking at reshoring to be another contributor to the demand in industrial real estate, particularly in lower cost areas in the Southeast and Midwest.

Peter Kolaczynski, CommercialEdge Operations Senior Manager

Manufacturers that reshore production will face a unique set of challenges. Not only will they need industrial space to manufacture goods but logistics and distribution facilities, as well. With a national vacancy rate of just 4.1%, space may be hard to come by.

A tight labor market means that site selection will not only be dependent on infrastructure but also on labor pools. American labor costs are also much higher than in places where manufacturing has been offshored, meaning firms will explore automation solutions and likely increase costs for their products to strike a balance.

Production and supply chains are complex systems that take years to reshape — reshoring is not a quick fix for firms struggling in the current global economy. We expect that reshoring will continue during this decade, albeit at a slow pace, and be a driver of industrial real estate demand for years to come.

Rents and Occupancy: Phoenix Rents Grow Despite New Supply Pipeline

National in-place rents for industrial space averaged $6.64 per foot in August, an increase of four cents from July and 5.5% over the last 12 months.

Rents grew the most in port markets, where record activity and supply-chain bottlenecks continue to drive demand for space. The Inland Empire (8.8% increase for in-place rents over the last 12 months), Boston (8.0%), Los Angeles (7.4%) and New Jersey (7.4%) saw the largest gains.

Phoenix had the highest rent growth among markets without a port, with in-place rents growing 7.2% over the last 12 months. Phoenix has been attractive to both occupiers and investors for a while now due to a lack of geographic constraints and strong population growth.

Additionally, some of the tightness in Southern California has overflowed into Phoenix, a six-hour drive from the ports of Los Angeles and Long Beach. Despite an abundance of new stock being delivered and more in the pipeline, space is still in high demand. In Phoenix, the vacancy rate in August was 3.8% and the average rate of a new lease signed over the previous 12 months was 96 cents higher than the market average for in-place rents.

Average Rent by Metro

New leases cost $1.44 more per foot than the average in-place lease. Leases signed in the last 12 months average $8.08 per square foot. The largest premiums paid for new leases were in Los Angeles (new leases at $4.75 per square foot more than in-place rents), Orange County ($4.38), the Inland Empire ($4.27) and New Jersey ($4.22). No other market had a premium higher than $1.70 per square foot.

The national vacancy rate in August was 4.1%, down 30 basis points from the previous month. The lowest vacancy rates in the country were in the Inland Empire (0.9%), Columbus (1.8%), Nashville (1.9%), Los Angeles (2.0%) and Indianapolis (2.0%).

Supply: Charlotte Pipeline Expanding

In all, 703.5 million square feet of industrial space are under construction nationally, representing 4.0% of stock. Despite rising interest rates increasing the cost of capital and concerns of a recession, the under-construction pipeline continues to expand.

Industrial Space Under Construction (Million Sq. Ft)

After a couple of slow years for industrial development, Charlotte pipeline is heating up again. The market delivered 14.8 million square feet between 2018 and 2019, but only 1.7 million square feet in 2020 and 2.8 million in 2021. That slowdown appears to be over, with 4.6 million square feet already completed through August of this year, 14.5 million square feet currently under construction and an additional 23.0 million square feet in the planning stages.

National Industrial Pipeline

NorthPoint Development has been constructing many of the largest projects in Charlotte. The firm’s largest project in the market is the Gateway 85 industrial park in Gaston County, which has delivered the first two spec buildings totaling 909,000 square feet and has more space underway. Amazon signed a lease for the 286,727-square-foot Building 1. NorthPoint is also developing the 677,000-square-foot I-85 Commerce Center in Rowan County and recently rezoned more than 400 acres near the intersection of I-77 and I-40.

National New Supply Forecast (Square Feet)

Transactions: New Jersey’s Volume Driven by Numerous Sales

Nationally, there were $57.6 billion of industrial transactions during the first eight months of the year.

Year-to-Date Sales (Millions)

The average sale price of an industrial building in the third quarter sits at $131 per square foot, 4.3% ($6) lower than the second quarter. While it is too early to say whether prices in the third quarter will ultimately finish lower, the current dip deserves attention. The national average sale price has increased for seven straight quarters, and a decrease could signal cooling.

Year-to-Date Sale Price Per Square Foot

Although there have been no major transactions in the market, New Jersey has been one of the highest-volume markets, thanks to a large number of smaller sales. So far, this year has seen $2.3 billion in sales across 128 transactions.

Quarterly Transactions (Billions)

The largest industrial sale in New Jersey is the $110.4 million sale of Middlebrook Crossroads, an 18-building industrial park with 581,000 square feet of space. On a price-per-square-foot basis, the most expensive sale in the market has been LBA Realty’s $62.8 million purchase of 120 Frontage Road, a new property by Newark Liberty International Airport, for an average sale price of $827 per foot.

Quarterly Transactions Price Per Square Foot

Western Markets: Inland Empire Rents Up 8.8% Year-Over-Year

Port markets continued to see the highest rent growth, and the Inland Empire and Los Angeles remained among the markets with the largest increases over the past 12 months.

Specifically, the Inland Empire registered the highest increase in rents across the top 50 industrial markets in the U.S., coming in 8.8% over year-ago figures for an average rate of $6.98 per square foot. By comparison, leases signed in the past year averaged $11.25 per square foot, $4.27 higher. On the same note, Los Angeles industrial rents were up 7.4% year-over-year for an average of $10.84 per square foot, with new leases signed for $15.59 — $4.65 higher.

Leases signed over the past 12 months in Orange County clocked in at $16.38 per square foot. At the same time, the overall average rent for Orange County industrial space stood at $12.00 per square foot, 7.2% higher than 12 months ago.

In addition to California claiming two of the five highest year-over-year increases, Western markets also led among markets without ports with Phoenix’s 7.2% year-over-year increase. Additionally, some of the lowest vacancy rates were also recorded here, with the Inland Empire squeezed to a mere 0.9% vacancy rate, Los Angeles sitting at 2.0% and Orange County at 3.0%.

West Regional Highlights

With close to 45 million square feet under construction, Phoenix is also on track to increase its stock by 15.2%, the highest percentage across the top industrial markets. Looking to ease some of its minuscule vacancy rate, there were 36 million square feet of industrial space under construction in the Inland Empire at the end of August, the equivalent of 6.0% of the local stock, with additional projects in the planning stages bringing forecasted new supply to 10.8% of its existing stock.

In terms of sales, two Western markets surpassed the $3 billion mark: At $3.71 billion, Los Angeles had the largest sales volume in the country, with the Inland Empire fourth with $3.21 billion in industrial sales. At the same time, Phoenix reached a sales volume of $2.41 billion, and the Bay Area totaled $1.66 billion.

Orange County, the Inland Empire and Los Angeles remained the most expensive markets by significant margins, with their respective year-to-date rates clocking in at $360 per square foot, $336 per square foot and $295 per square foot. In fact, Seattle ($243), the Bay Area ($237) and Phoenix ($221) posted the next-highest rates.

Midwestern Markets: Kansas City Eyes 18% Increase of Existing Industrial Footprint

Detroit had the sharpest increase in industrial rents in the Midwest and its 6.7% year-over-year climb lifted its average rate to $5.80 per square foot, with new leases averaging $1.04 more. Cincinnati was the only other Midwestern market where rents appreciated by 5.0% or more year-over year: Up 5.3% over year-ago figures, Cincinnati’s $4.22 per square foot average was one of the lowest among leading industrial markets, with St. Louis ($4.23), Indianapolis ($4.06) and Columbus ($4.03) coming in below that figure.

Additionally, at 1.8%, Columbus had the second-lowest vacancy rate among leading industrial markets, while Indianapolis tied with Los Angeles at 2.0% and Kansas City closed August at 3.2%.

Midwest Regional Highlights

In terms of new supply, Kansas City was second only to Phoenix when it came to new supply, with projects under construction and those in the planning stages set to increase its footprint by 18.1% of its existing stock. Kansas City was followed by Indianapolis where under construction plus planned projects are set to increase the market’s footprint by 14%, while Columbus’s 17.5 million square foot construction pipeline along with planned developments would increase the local industrial stock by 9.4%.

Chicago had the third-largest sales volume nationwide at $3.38 billion, while Columbus had the second-largest sales volume among Midwestern industrial markets at $882 million. It was followed by the Twin Cities and Indianapolis with $710 million and $701 million, respectively.

At a year-to-date sale price of $106 per square foot, the Twin Cities were the Midwest’s industrial price leaders, with Chicago second at $89 per square foot and Columbus third at $83 per square foot.

Southern Markets: Nashville Claims Lowest Vacancy Rate & Highest Sale Price

Among Southern markets, Dallas-Fort Worth saw the highest rate of rent growth, coming in at $4.92 per square foot, 5.4% higher than 12 months prior. Nashville followed with a 5.2% year-over-year increase that lifted the average Nashville industrial rent to $5.37 per square foot.

Additionally, both markets saw lease spreads widen: Leases signed over the past 12 months averaged $5.84 per square foot in Dallas (92 cents more than the overall average), while the average rate for new leases in Nashville was $6.24 per square foot, 82 cents higher than the overall average.

And while the Dallas vacancy rate closed August at 3.7%, Nashville was at a mere 1.9% — the lowest vacancy rate among leading Southern markets.

South Regional Highlights

With industrial development heating up again in Charlotte after a few sluggish years, under construction industrial projects along with planned projects amount to 13.2% of the city’s existing stock, after already having completed 14.5 million square feet year-to-date. But Dallas stood out here too, with under-construction projects totaling 59.5 million square feet — or 7.0% of its existing stock. Adding in planned projects too, Dallas is set to increase its stock by 11.2%.

In terms of sales, Houston claimed a leading position again, with its $3.4 billion sales volume the second largest nationally, outpaced only by L.A.’s $3.71 billion. Dallas had the fifth-largest sales volume across the top 50 industrial markets in the country, closing $2.98 billion by the end of August, with Atlanta’s $1.18 billion the third-largest sales volume among Southern markets.

But the priciest industrial market in the South was Nashville with a year-to-date sale price average of $167 per square foot, followed by Houston’s $149 and Tampa at $130.    

Northeastern Markets: New Jersey Development Pipeline Nears 15 MSF

In the Northeast, New Jersey posted one of the highest lease rates at $8.53 per square foot, up 7.4% year-over-year. Not only that, but new leases were signed at an average $12.75 per square foot, resulting in one of the widest lease spreads in the region. Additionally, New Jersey also had one of the lowest vacancy rates in the region at 2.8% — not a surprise, considering the unrelenting demand port markets have been facing in the past 2+ years.

Philadelphia lease rates were on the rise too, increasing 5.6% over the past 12 months to close August at $6.41 per square foot. In fact, contracts inked over the past year averaged a $8.05 per square foot rate, while the local vacancy rate clocked in at 5.0%. However, Baltimore’s vacancy was a lower 4.6%, while the average lease rate was $6.82 per square foot. Although rent growth for Baltimore industrial spaces was a slower 4.8% compared to Philadelphia, leases signed over the past 12 months averaged $8.53 — 48 cents pricier than Philadelphia.

Northeast Regional Highlights

New Jersey had the largest development pipeline among Northeastern markets, with $14.86 million square feet under construction, the equivalent of 2.8% of its existing stock. When counting planned projects as well, this major port market is set to increase its industrial footprint by 4.9%. Baltimore had the next largest development pipeline, totaling 6.22 million square feet or 3.1% of the existing stock — that figure jumps to 4.9% when taking into consideration planned projects as well.

Boston’s pipeline was close to equal to Baltimore’s at 6.15 million square feet, while Bridgeport, Conn.  had 2.28 million square feet under construction in August.

New Jersey had the largest sales volume in the Northeast at $2.26 billion, followed by Philadelphia’s $1.82 billion and Boston’s $1.26 billion. Boston claimed the highest sale price, with year-to-date transactions averaging $177 per square foot, while New Jersey averaged $168 across 128 sales and Philadelphia’s year-to-date deals sold at an average $114 per square foot.

Economic Indicators: E-commerce Deceleration Continues

Following the spike in e-commerce during the first year of the pandemic, things have cooled. Between 2010—when the Census Bureau began producing e-commerce data—and 2020, e-commerce sales grew at a year-over-year rate of less than 10% only once. Three of the last four quarters have had growth below 10%, including the last two quarters, which were the lowest on record, with growth of 6.8% year-over-year.

E-Commerce Sales

In the second quarter, e-commerce sales grew by $6.9 billion, or 2.7% over the first quarter. While that was lackluster compared to previous years, there are reasons for optimism. Growth continued in the second quarter even as high gas prices ate into consumers’ budgets and Walmart, Home Depot and Lowe’s all reported growing e-commerce sales.

E-Commerce as Percentage of All Commerce:

Despite economic headwinds, we expect continued growth in e-commerce sales in the third quarter, including sales from Amazon’s Prime Day, and the fourth quarter, which encompasses Black Friday and holiday shopping.

Download the complete September 2022 report for a full picture of how U.S. industrial markets fared in the first eight 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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above.

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• The average national in-place rent increased 5.3% year-over-year to reach $6.60
• Demand pressures drove the U.S. industrial vacancy rate further down to just 4.4%
• Nearly 200 million square feet of new space were delivered in the first seven months
• Year-to-date industrial sales totaled $49.9 billion at a $130 per-square-foot sale price

Supply chain issues continue to mar post-COVID activities across all economic and consumer sectors, and the industrial market is no exception. While demand for new industrial space continues to squeeze vacancies to ever-shrinking lows and widen the gap between in-place rents and new leases, new deliveries are coming online at a slower pace due to supply chain disruptions. As a result, the industrial sector is faced with a catch-22 scenario where the new supply that would ease pressures is also delayed by supply chain issues, turning the pressure up even more.

Although Amazon’s pullback from its aggressive development stance should help ease some of the pressures facing new developments, high demand, China’s zero-COVID policy, the pre-pandemic truck driver shortage and new safety regulations affecting the latter, as well as continued backlogs in ports for container offloading will still present hurdles both to the wider supply chain landscape and the pace of development for new industrial space.

Read to the end and download the full August 2022 report for updated lease rate and vacancy stats for all major U.S. markets. 

Lease Spread Hits Historic High Nationally at $1.45 Per Square Foot

The national in-place rent for industrial space inched up 3 cents month-over-month to $6.60 per square foot, marking a 5.3% price increase over year-ago figures. And with demand unrelenting, new leases averaged $8.05 per square foot in July, resulting in a national lease spread of $1.45 per square foot.

Not only was that figure significantly higher than the 88-cent premium that new leases reached in June, but it actually marked a new historic high for lease spreads, promising sustained rent growth for the upcoming years. Few markets — and all of them inland — saw new leases signed at lower rates than in-place contracts.

Conversely, Southern California tenants continued to contend with some of the highest rents and fastest growth rates in the country, as well as the widest gaps between in-place rents and new leases. In-place rents for Los Angeles were up 7% year-over-year, reaching $10.74 per square foot in July. But new lease premiums were the highest nationwide, reaching $4.89 per square foot.

The Inland Empire ($6.91/ sq. ft) logged the highest year-over-year rent increase at 8.7% and posted a $4.56 per square foot gap between new leases and in-place contracts. Further down south, Orange County continued to lead industrial rents nationally at $12.11 per square foot, with new contracts inked at a $4.38 higher rate.

Continued Demand Narrows National Vacancy Rate to 4.4%

The national vacancy rate stood at 4.4% in July, down 20 basis points month-over-month and 140 basis points lower than July 2021. The Inland Empire continued its unrelenting domination of occupancy rates, posting a mere 0.8% vacancy rate in July, up 20 basis points month-over-month. It was followed closely by Columbus at 0.9% and Los Angeles at 1.9%.

On the other end of the spectrum stood Tampa with an 8.7% vacancy rate, followed by Houston at 8.6% and Boston and 8.4%.

National Construction Pipeline Nears 700 Million Square Feet

Year-to-date, the industrial sector saw close to 200 million square feet of new space come online. Nevertheless, the national construction pipeline grew by 28.2 million in July, reaching 695.7 million square feet — 4% of the existing stock. At 661.9 million square feet, planned projects nearly equaled under construction supply, despite the tempered pace of e-commerce growth and rising development costs.

Dallas continued with a rapid pace of development, breaking ground on 4.5 million square feet of new industrial space and bringing its development pipeline to 61.4 million square feet. Phoenix followed with the second-largest construction pipeline (45.2 million square feet) and a robust outlook for further development.

In Columbus, industrial space development is being driven not only by its regional economic power and powerful logistics sector, but also by data center development, an industrial segment empowered by Ohio’s tax incentives. In fact, two data center projects of 1.5 million square feet each represent a significant portion of its 17.9 million square feet of under-construction projects.

Industrial Sales Volume Totals Almost $50B Nationwide

July’s $10.3 billion in sales brought the national year-to-date sales volume to $49.9 billion, pushing Los Angeles and Houston north of the $3 billion marker. Sales activity was particularly strong in submarkets situated close to the ports of Los Angeles and Long Beach. The San Gabriel Valley, for example, closed $694.9 million in industrial sales, while 26 sales in South Los Angeles totaling $412 million brought Los Angeles’ overall sales volume to $3.3 billion — the largest nationwide.

Los Angeles took the lead in pricing as well, with its 2022 average at $291 per square foot. Although $6 lower than in 2021, the average price for industrial space in Los Angeles remained more than 50% higher than in 2019.

Download the complete August 2022 report for a full picture of how U.S. industrial markets fared in the first seven months of 2022, including insights on industry and economic recovery fundamentals. 

You can also see our previous industrial reports.

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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above. 

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• The average national rent increased 4.9% year-over-year to reach $6.57
• Unrelenting demand squeezed the U.S. industrial vacancy rate to just 4.6%
• 159.6 million square feet of new space were delivered in the first six months
• Q2 sale prices reached $138 per square foot, up 31.3% year-over-year

Regardless of shifting economic trends and uncertainty in other sectors, industrial assets continue to attract unrelenting investor attention. With supply far outstripped by demand, developers are starting to adopt new models of industrial development. Those in markets with limited land for industrial projects — such as port markets and densely populated urban centers — are starting to explore alternatives to the traditional single-floor industrial model.

One such alternative is the multi-story industrial center, a novelty in the U.S. industrial landscape, but a staple of Asian industrial sectors. Although multistory facilities cost about 40% more for the same square footage as single-story facilities, this alternative may become a lucrative niche, along with conversions from office and retails spaces to industrial assets.

In markets with minimal vacancies, outdoor storage lots have also increased in popularity due to their overall low cost but remain a highly limited option in most markets, with low chances of adding similar new space due to zoning challenges.

Read to the end and download the full July 2022 report for updated lease rate and vacancy stats for all major U.S. markets. 

National Vacancy Rate Tightened by 120 Basis Points Year-over-Year

The national in-place rent for industrial space increased 4 cents month-over-month to $6.57 per square foot, marking a 4.9% price hike over year-ago figures. Additionally, new leases have been signed at an average $7.65 per square foot over the past 12 months — 88 cents higher than in-place lease rates. The national vacancy rate stood at 4.6% in June, down 10 basis points month-over-month and 120 basis points lower than June 2021.

Far from the minimal vacancy rates and double-digit rents of California’s industrial sector, the Detroit market ($5.78/sq. ft) has also seen increased interest in industrial space recently. Its proximity to the northern border and high levels of import-export activity at nearby Port Huron have been contributing to Detroit’s visibility as an industrial prospect, especially considering its 7.2% vacancy rate and a lease spread of only 23 cents.

Southern California Rents Rose 6.5% and More Over the Past 12 Months

As has been the case for several quarters now, rents increased at a significantly faster pace in coastal markets, as high demand, tight vacancies and geographic constraints limiting further development continue to increase the disparity between supply and demand. Continuing the trends of the past two years, Southern California remains the most sought-after area. As a result, new tenants have to contend with the widest spread between in-place rents and new leases.

Los Angeles had the widest lease spread in June, with new contracts signed for $4.37 per square foot more than the average rate of $10.63 per square foot — the second-highest rate among the country’s top industrial markets. Los Angeles also featured the third-lowest vacancy rate nationally at 1.9%.

Orange County ($12/sq. ft) may still have some industrial space for rent at a 3.5% vacancy rate, but the O.C. market had the second-widest lease spread nationally, with new leases signed at a $3.98 per square foot premium. This was closely followed by the Inland Empire’s $3.77 per square foot premium. The Inland Empire also logged the sharpest rent gains with a 7.4% year-over-year jump that brought the local average to $6.86 per square foot. It also remained the tightest industrial market in the U.S. with a 0.6% vacancy rate.

National Construction Pipeline Hits 667.5 MSF After 11 MSF Added in June

11 million square feet of industrial space broke ground in June, bringing the national construction pipeline to 667.5 million square feet, representing 3.8% of the existing stock. In addition to that, 684.6 million square feet — the equivalent of 7.8% of the existing inventory — was in the planning stages.

And, despite a slowdown in e-commerce growth, logistics and fulfillment centers serving online retail have accounted for a large part of the 159.6 million square feet of new industrial space that came online in the first two quarters of 2022.

At the individual market level, Dallas delivered the largest amount of new industrial space with 15.9 million square feet completed in the first six months of the year. It also had the most sizeable construction pipeline with nearly 57 million square feet, or 6.8% of its current stock, and another 4% in the planning stages.

Phoenix followed with the second-largest construction pipeline (43.8 million square feet) after already delivering 7.7 million square feet — the third-largest new inventory delivery year-to-date. Projects with shovels in the ground and those on the drawing board totaled 37.7% of the local stock midway through the year.

With logistics centers a significant percentage of Indianapolis’ existing stock, they continue to represent much of the market’s 24.2 million square feet of under-construction space. In fact, Indianapolis had the fifth-largest development pipeline nationwide, after already delivering the second-largest square footage of industrial space year-to-date with 7.9 million square feet of new space.

End of Q2 Marks Seventh Consecutive Quarter of Sale Price Growth

June’s $8.4 billion in sales brought the national year-to-date sales volume to $39.6 billion, as prices continued to surge. Specifically, the year-to-date price per square foot was $129. The second quarter, however, reached a sale price average of $138, up 31.3% year-over-year. It also represented a 12.4% increase over Q1 figures and marked the seventh consecutive quarter of price gains, during which time the national average sale price for industrial space rose a whopping 67%.

At the market level, Southern California remained the price leader as investors continued to battle over the most sought-after industrial assets nationwide.

Download the complete July 2022 report for a full picture of how U.S. industrial markets fared in the first six months of 2022, including insights on industry and economic recovery fundamentals. 

You can also see our previous industrial reports.

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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above. 

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• The average national rent for industrial space inched up to $6.53 per square foot
• Vacancies tightened to 4.7% nationwide, with the Inland Empire squeezed to 0.6%
• The national construction pipeline reached 656.5 million square feet
• Q2 2022 on track to mark seventh consecutive quarter of sale price gains

Inflation and rising interest rates are expected to bring some changes to the national industrial market, with some of the most likely ones expected in buying patterns. Some potential buyers will be retreating from the market, while bullish investors are expected to target vacant or soon-to-be vacant assets to capitalize on growing lease spreads, while others may even consider negative leverage deals and bet on further price growth.

Amazon, the largest player in the industrial market that spurred a significant share of the past two years’ industrial boom is already pulling back, but not because of legislative changes. Rather, the e-commerce giant has come to realize it overextended its logistics footprint, and, after marking its first quarter of losses in seven years, has canceled, paused and delayed multiple large developments.

Media reports claim that the retail giant will also allow several leases to expire without renewing in order to further downsize. Additionally, Amazon will likely sublease 10 million square feet of industrial space at the minimum, mostly in very tight markets that include Southern California, New Jersey, New York and Atlanta.

Read to the end and download the full June 2022 report for updated lease rate and vacancy stats for all major U.S. markets. 

Lease Spreads Widen as Rents Continue to Surge in Coastal Markets

The national in-place rent for industrial space rested at $6.53 per square foot in May, five cents higher than in April and up 4.7% year-over-year. Coastal markets continued to record the most significant rent increases, as demand for industrial space continued to remain high, with many of the same markets also logging the largest lease spreads between new and in-place rents.

In Los Angeles, for example, new leases were signed at an average of $14.53 per square foot — $3.96 more per square foot compared to the $10.57 per square foot average of in-place rents, which were already some of the highest in the country. In fact, Los Angeles had the third-highest average industrial rent nationwide and at 7.2% year-over-year, claimed the sharpest increase.

The Inland Empire is another coastal market where rents have been surging and lease spreads widening. Up 6.8% year-over-year, the average rent for Inland Empire industrial space reached $6.81 per square foot. At the same time, new rents averaged $10.61 per square foot, resulting in a $3.80 spread per square foot. Boston’s spread stood at $1.78 per square foot in May and claimed the third sharpest year-over-year price increase at 8.6%.

Demand for Inland Empire Industrial Space Squeezes Vacancy Rate to 0.6%

The national average vacancy rate for industrial space stood at 4.7%, down 30 basis points month-over-month. Compared to May 2021, the national vacancy rate contracted 100 basis points, coming down from 5.7% due to sustained demand for industrial space across the country, not just in red-hot coastal markets. For their part, coastal markets continued to further tighten as evidenced by the fast-paced growth of industrial rents as well.

The Inland Empire industrial market was squeezed to a minuscule 0.6% vacancy rate in May. And as has been the case for quite some time now, some of the next lowest vacancy rates were recorded in other Southern California markets such as Los Angeles (2.1%) and Orange County (3.3%) — two of the three most expensive industrial markets in the U.S.

National Construction Pipeline Hits 656.5 MSF As Vacancies Further Tighten Across Top Markets

Representing 3.8% of existing U.S. stock, nationally there were 656.5 million square feet of industrial space under construction in May. At the same time, planned projects that have yet to break ground totaled 7.8% of existing industrial inventory. But not all planned projects will go through, especially in California where vacancy rates are hitting historic lows, as backlash from residents and government officials means a slowdown in industrial construction is to be expected.

A new bill (Assembly Bill 2840) is moving through the state legislature that will significantly slow down and limit new projects. If it passes both houses, AB-2840 will ban municipalities from approving industrial developments of 100,000 square feet or more within 1,000 feet of residential areas, schools and community centers.

This will most likely lead to even greater pressure on California’s industrial markets, especially in Southern California, which will probably force industry players to reorient themselves towards other markets in the area and spur overflow development in the markets of Central Valley, Phoenix and Las Vegas.

Houston Sales Volume Reaches $2.6 Billion As Six More Markets Surpass $1 Billion

Industrial sales totaled nearly $31.2 billion, which brought the year-to-date average sale price to $132 per square foot. Not only that, but the second quarter is now averaging a $140 average sale price, which would make it the seventh consecutive quarter of price gains for industrial sales, which has since lifted the national sale price by 69%.

New Jersey, Phoenix, Los Angeles and Chicago were the only markets with more than $1 billion in industrial sales in April — joined by Houston’s $2+ billion sales volume. In May, however, the $1 billion threshold was also surpassed by Dallas and Philadelphia. The Inland Empire is also closing in fast with a $970 million sales volume, while Houston’s $2.6 billion suggests it’s well on its way to reaching $3 billion.

Download the complete June 2022 report for a full picture of how U.S. industrial markets fared in the first five months of 2022, including insights on industry and economic recovery fundamentals. 

You can also see our previous industrial reports.

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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above. 

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• The average national rent for industrial spaces rested at $6.47 per square foot
• Vacancies for U.S. industrial space remained flat at 5% in April
• National construction pipeline surpasses 640 billion square feet
• The average sale price reached $135 per square foot

The industrial sector remains strong despite a volatile economic environment both nationally and globally. Drivers of industrial demand continue to stay solid and are expected to be robust in the in the short term and probably beyond — a recent study by Prologis estimated that only 16 months’ worth of industrial supply remains in the U.S. That figure is far from meeting market demand, even as the industry’s construction boom continues.

Major port markets especially continue to struggle with inventory and supply pressures — chief among them the leading ports of Southern California, Miami and the New York-New Jersey corridor. With secondary markets also under pressure to meet growing demand and capture needs unmet by the leading industrial markets, rent growth is expected to remain robust and development to continue at a rapid pace.

Read to the end and download the full May 2022 report for updated lease rate and vacancy stats for all major U.S. markets. 

New Industrial Leases Claim Premiums a Full Dollar Higher Than Existing Contracts

National in-place rents for industrial space rested at $6.47 per square foot in April, remaining flat compared to March, but 4.4% higher than year-ago prices. Considering the substantial pressure on existing stock and underserved demand for new supply, the 12-month rolling average for new industrial leases was $7.48 per square foot — a full dollar higher than in-place leases.

Keeping in mind the drivers of this accelerated demand for new industrial space, new lease premiums are expected to continue to rise. For example, just in April, the 12-month rolling average for new leases came in 13 cents higher than March figures.

Newly signed lease averages were highest in coastal metro markets, led by Orange County industrial space with a $15.55 per square foot rate. Other major markets following the same strong pricing trends for new industrial leases were Los Angeles ($13.94/sq. ft), the Bay Area ($12.16/sq. ft) and Miami ($10.25/sq. ft).

Vacancies in Leading Coastal and Midwestern Markets Stay Under 3%

The national average vacancy rate for industrial space stood at 5%, remaining flat month-over-month. Compared to January 2021 levels, the national vacancy rate now sits 120 basis points lower.

Moreover, seven of the country’s top markets now feature vacancies no higher than 3%, with the Inland Empire almost completely occupied: Its vacancy rate stood at a miniscule 0.8% in April. In addition to the Inland Empire, four more coastal markets are contending with vacancies of up to 3%, among them Los Angeles (2.1%), New Jersey (2.8%) Central Valley (2.9%) and Miami (3%).

Among landlocked markets, the Midwest’s top performers in terms of occupancy were Indianapolis and Columbus, closing April with vacancies of 2.1% and 2.3%, respectively.

Construction Pipeline Totaled 3.7% of Existing Stock in April

The industrial construction pipeline stood at 640.1 million square feet nationally, accounting for 3.7% of the existing U.S. industrial stock. Despite rising construction costs, supply chain disruptions and persisting labor shortages, the industrial sector’s fundamentals are expected to stay strong and as a result, new projects are planned throughout the U.S. To be precise, an additional 650 million square feet of industrial space were in the planning stages in April, the equivalent of 4% of the existing stock.

 Dallas and Phoenix had the largest volume of under-construction industrial space, with 52.67 million square feet and 41.52 million square feet, respectively. Phoenix especially is feeling the pressure of demand redirected from California’s saturated industrial markets. Specifically, Phoenix had the equivalent of 14.6% of existing stock under development. Taking into account projects in the planning stages, the total new supply in Phoenix might reach as high as 35% of current stock.

Industrial Sector Closes Almost $19 Billion in Industrial Sales Since January

Industrial sales totaled nearly $19 billion year-to-date — an impressive sales volume, but one that is expected to remain below totals registered during the same period last year. This comes as investor interest has pushed prices to record highs throughout the U.S. Specifically, the national average sale price stood at $135 per square foot in April, 20% higher than 2021’s average.

Year-to-date, the largest sales volumes were recorded in New Jersey, Phoenix, Los Angeles and Chicago, with all four markets surpassing $1 billion in sales. However, Houston outperformed all other major markets, recording more than $2 billion in industrial transactions since the start of the year.

Download the complete May 2022 report for a full picture of how U.S. industrial markets fared in the first months of 2022, including insights on industry and economic recovery fundamentals. 

You can also see our previous industrial reports.

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; and forecasts, as well as the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report above. 

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