• 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.

• The average U.S. office listing rate stood at $38.04 per square foot, up 1.1% year-over-year  
• Up 80 basis points year-over-year, the national vacancy rate rested at 16.6%  
• Under-construction office space reached 123 million square feet or 1.9% of total stock 
• Office sales totaled $1.9 billion in January, with assets trading at $202 per square foot 
• Remote work and tech layoffs continue to push Denver vacancy rates higher, reaching 18.3% 
• Listing rates in Chicago and the Twin Cities were among the four lowest in the country 
• Dallas led development in the South with nearly 7.4 million square feet underway 
• Boston recorded the highest average sale price at $1,054 per square foot 

In the years since the pandemic unsettled the office market, many have been anticipating an increase in distressed offices. While distressed activity has been muted to this point, weak demand, falling prices and a potential recession could lead to an increase in distressed sales in 2023, as well as one of the smallest sales volumes since the Great Recession, the CommercialEdge U.S. office market report reveals. 

Higher interest rates have already put pressure on owners with floating-rate debt and will provide a substantial challenge for loans that need to be refinanced this year. Remote and hybrid work have become entrenched and the tech industry — which drove much of the leasing of office space in recent years — is now contracting and laying off workers, thus further decreasing demand for office spaces.   

“We know distress activity will increase this year. We are closely monitoring the loans that are coming due and how they are being handled on both the owner and lender side.”

– Peter Kolaczynski, CommercialEdge Senior Manager

Metros with high quality office products might be better positioned to weather the storm, as tenants continue to look for well-amenitized, Class A office space in premium locations. This trend is expected to put downward pressure on older assets, especially those that are not well-located and well-kept, positioning these at a higher risk of distress as well.  

Additionally, with demand for office space continuing to be lower, we expect that many of the distressed properties that are sold may be targeted for redevelopment and conversion into life sciences or multifamily properties. 

Listing Rates and Vacancy: Vacancy Increases Accelerate in Tech-Heavy Metros 

Across the top 50 U.S. office markets, the average full-service equivalent listing rate was $38.04 in January, an increase of 1.1% over the past 12 months. At the same time, the U.S. office vacancy rate continued to rise, reaching 16.6%, up 80 basis points over January 2022. 

Although office vacancy rates continued to climb in most markets, some places have seen rates rise more rapidly than others since the pandemic upended the office market. Metros that owe their rapid growth to the tech sector have particularly felt the pressure of the remote work culture and recent tech layoffs.  

Top Listings by Metro Area: January 2023

Despite the steady rise in vacancy rates over the last couple of years, listing rates are still holding steady, thanks to tenants’ flight to quality. In January, the average listing rate for Class A and A+ office space was $46.70 per square foot, marking a 2.0% increase year-over-year. At the same time, Class B rates fell 0.7% to $30.11 per square foot.  

In terms of location, office assets in CBDs claimed the highest listing rates at $51.43, up 3% over the past 12 months, while suburban assets stood at $30.47, also up 3.1% year-over-year. Urban office spaces, however, continued to depreciate, with rents falling 4.3% below the figures recorded at the beginning of 2022. 

Supply: Five Markets Account for One Quarter of National Construction Pipeline

As of January, there was 123.6 million square feet of office space under construction nationally, accounting for 1.9% of total inventory. The top five markets by total square footage — Boston, Manhattan, Dallas, Austin and San Francisco — accounted for more than a quarter of all new supply being built. 

Office Space Under Construction (Million Sq. Ft) 

The influx of people into Texas in recent years has helped prop up office markets that have been hit by remote work. Dallas has let developers remain active in the market, with 4.1 million square feet started last year and more soon on the way. The Fields — a 180-acre, $2 billion mixed-use project in Frisco — will eventually include four million square feet of office space alongside retail, restaurants, apartments and hotels. 

Although offices in urban locations experienced the sharpest decline in asking rents, developers were most active in these areas. As of January, there were more than 66.5 million square feet of office space under construction in urban locations, representing 4.9% of total stock. Meanwhile, offices in CBDs and suburban areas are set to increase the national stock by 1.4% and 1.2%, respectively.  

Transactions: Distressed Sales Likely to Increase in 2023

CommercialEdge recorded $1.9 billion in office transactions in January, with properties trading at $202 per square foot.  

But taking into account the overall economic uncertainty, the entrenchment of remote work and the upheavals triggered by increased interest rates, office market outlooks anticipate that there will not be much capital for office transactions this year.  

Investors may still be able to find loans for well-located buildings with strong occupancy and cash-flow, but for the most part, deals for office buildings will likely fail to materialize. It’s expected that office transaction volumes in 2023 will be at their lowest levels since the years following the Great Financial Crisis. 

Year-to-Date Sales (Millions) 

Higher interest rates have already put pressure on owners with floating rate debt and will provide a substantial challenge for loans that need to be refinanced in 2023. The national average sale price of an office property fell from $269 per square foot in the first quarter of 2022 to $214 per square foot in the fourth quarter. A flood of distressed office sales could trigger a downward price spiral for offices. 

Distressed sales will most likely increase in frequency this year, but it is too early to say whether it will be a large wave. With demand for office space continuing to be soft, many of the distressed properties that are sold may be targeted for conversions into life sciences or multifamily, with some razed and entirely redeveloped. 

Western Markets: Remote Work Drives Up Vacancies in Denver 

With vacancy rates rising across the nation’s largest office markets, the West also followed suit. For instance, Denver’s vacancy rate in January stood at 18.3%, up 200 basis points (bps) over the last 12 months and 370 basis points over the last two years. Other leading tech markets, such as Seattle, San Francisco, and Portland also saw their office vacancy rates increase by 1.47%, 2.87 % and 3.20% year-over-year in January.  

In fact, all leading western markets experienced continued increases in vacancies over the past 12 months. While Portland’s 3.2% rise was the most significant, even San Diego — with its thriving life sciences sector — saw a year-over-year uptick of 0.27%. This lifted the local vacancy rate to 14.09%, which is still the lowest among leading western office markets. 

Circling back to Denver, the main cause of increasing office vacancy rates in the Mile High City is remote work. According to the Census Bureau’s American Community Survey, 28% of respondents in the market reported working from home, one of the highest shares in the country. Additionally, Denver has benefited from robust growth in the tech sector in recent years, and the layoffs currently hitting that industry will hamper the market. Denver’s sublease rate was 1.8%, a figure that could move upward in the future. 

West Regional Highlights 

Despite a nearly 19% vacancy rate, San Francisco continued to lead the West in asking rents at $67.43 per square foot. Local trends show that listing rates were still growing at a healthy pace here, further widening the pricing gap between San Francisco and other West Coast markets. Those include the Bay Area which at $57.06 per square foot demanded the second highest asking rents. 

Additionally, the West Coast’s top markets also led the region in terms of office development: San Francisco and Seattle both had 6.5 million square feet under construction in January, accounting for 4.2% and 4.7% of their existing stocks, respectively. And while the Bay Area’s office pipeline is set to increase the existing local stock by just 2.9%, that will still add 5.8 million square feet of new offices.

The three markets also had ample new stock in the planning stages, with San Francisco’s under construction and planned pipeline as high as 20%. However, considering the increasing headwinds faced by both the office and tech sectors, much of that planned pipeline may not materialize. In particular, there is growing nationwide concern regarding a potential spike in distressed office sales, due to low occupancy, expiring leases and maturing loans.  

Sale Price by Asset Type 

Tenant flight-to-quality has been taking place since the pandemic, with firms decreasing the size of their footprints but increasing the quality of the space they lease. This puts older assets, especially those that are not well-located and have not been well-maintained, at high risk of distress as well. Yet even trophy towers are not exempt, with Brookfield defaulting on $784 million in loans for two office towers in downtown Los Angeles. 

For now, however, distressed sales have remained mostly in the realm of future worries. But what has materialized is the decrease in sale prices for office assets: While Q1 2022 averaged $290 per square foot, Q4 ended at $271 per square foot. Moreover, January assets traded at an average $202 per square foot, totaling $1.9 billion, a third of which was concentrated in just two markets: Houston and Miami. On the West Coast, Los Angeles had the highest sales volume with $96 million in office deals, followed by San Francisco’s $73 million sales volume and Phoenix with $57 million.  

Midwestern Markets: Chicago & Twin Cities Off to a Slow Start in 2023 

The Midwest office market remained one of the most sluggish nationwide, with key fundamentals in the region’s leading markets changing little overall. Asking rents in Chicago saw a slight 0.26% uptick month-over-month in January, ticking up to $27.80 per square foot.  

At the same time, the St. Paul – Minneapolis market closed the month at $25.85 per square foot, decreasing 0.8% compared to December. These rates were among the four lowest in the country, accompanied by Phoenix’s $27.58 per square foot and Orlando’s $24.75 per square foot rates.  

At 19.44%, Chicago also recorded the fourth highest vacancy rate across the country in January, remaining flat both month-over-month and year-over-year. In the Twin Cities, vacancy rates did increase somewhat, inching up 0.12% on a month-over-month basis. Year-over-year, however, the metro experienced a higher 0.55% increase in vacancy rates, stabilizing at 15.07%. 

Midwest Regional Highlights  

Considering the region’s fundamentals and Chicago’s recent incentives to encourage office conversions, developers continue to remain wary of bringing too much new supply to the market. As of January, the Windy City had nearly 2.7 million square feet in the pipeline, accounting for 0.9% of its stock. Meanwhile, the Twin Cities had 676,369 square feet of office space underway in January, representing 0.6% of total inventory, outpacing only Tampa’s 382,099 square feet. 

And while Chicago ended 2022 among the top 10 metros for office transactions with $3.2 billion in sales, investors closed a mere $22 million in deals in January. The Twin Cities recorded the same amount in transactions, with the average sale price per square foot coming in at $203.  

Southern Markets: Developers’ Confidence in Dallas Continues to Increase  

Markets in the South continued to reap the benefits of the pandemic-driven worker migration and company relocation trends. Thanks to the more affordable local cost of living and business-friendly environment, Texas markets have especially benefited from the influx of residents, boosting developers’ confidence in the region. 

Although Austin had the largest construction pipeline on a percentage-of-stock basis at 7.6% (both in the region and nationally), Dallas led development in the region in terms of square footage, with nearly 7.4 million square feet underway. Vacancy rates have also been more resilient in the metro, increasing only 0.4% over the past 12 months, underscoring developers’ confidence in the market despite the headwinds faced by the office sector.  

Office Space Under Construction & Planned (% of stock) 

In terms of sales volume, another Texas market, Houston, took the lead nationally, closing $324 million in office deals in the first month of the year. This also broke down to an average price of $184 per square foot. Miami had the second largest sales volume nationwide at $316 million but resulted in a significantly higher sale price of $549 per square foot. 

Moreover, Miami also had the fourth-highest listing rate among the country’s top 25 markets, closing January at $47.24 per square foot. Austin and Washington, D.C. also recorded rates in the $40 range, exceeding the $38.04 per square foot national average. At the bottom of the list stood Tampa ($28.11), and Orlando ($24.43), although both metros saw slight increases on a month-over-month basis. 

South Regional Highlights 

Vacancy rates remained in the high teens in most markets in the South, with the exception of Houston and Atlanta where vacancy rates hit 25.99% and 20.03%, respectively. Austin had the third-highest vacancy rate in the region at 19.13%, up 283 basis points compared to January 2022. Nonetheless, this uptick in Austin office vacancies is negligible, considering the large amount of space that hit the market last year. At the same time, office vacancy rates remained flat month-over-month in Charlotte, with the metro’s 13.21% vacancy still one of the lowest rates in the region. 

Northeastern Markets: Boston Leads the Nation with Largest Construction Pipeline by Square Footage 

Among the 25 largest office markets in the U.S., Manhattan remained on the top for office asking rates at $75.74 per square foot, well above the second-highest rate recorded in San Francisco ($67.43) per square foot and the third-highest rate of $57.06 per square foot in the Bay Area. Overall, most office markets in the Northeast registered rates below the national average of $38.04 per square foot, with Philadelphia’s the lowest at $31.42 per square foot. 

In terms of vacancies, Brooklyn still had the largest amount of vacant space in the Northeast in January, with rates at 19.71%. On the national level, this rate was exceeded only by Atlanta’s 20.3% and Houston’s 25.99%. But Manhattan’s average vacancy rate grew at the fastest pace in the region, increasing by 2.59% compared to January 2022. 

Northeast Regional Highlights 

Developers were most active in Boston, with 12.9 million square feet of office space underway as of January, accounting for 5.4% of its total stock. Looking at it in terms of square footage, Boston had the highest pipeline nationwide, but also the second highest on a percentage-of-stock basis. Conversely, New Jersey had the lowest pipeline in the region, with roughly 1.5 million square feet or 0.8% of its total inventory under construction. 

In line with national trends, sales activity was muted across leading Northeastern markets: New Jersey was in the lead with $96 million in office transactions, followed by Philadelphia’s $69 million sales volume and Boston’s $56 million. Nonetheless, Boston saw the highest average sale price at $1,054 per square foot. 

Office-Using Employment: Washington D.C. Struggles to Add Jobs 

Office-using sectors of the labor market grew 3.1% year-over-year in January, with professional and business services adding 82,000 workers in the month and financial activities adding 6,000 according to the Bureau of Labor Statistics (BLS). However, the information sector lost 5,000 jobs per the same source. 

Office-Using Employment Growth by Sector  

In the nation’s capital, office-using employment growth remained sluggish. Metro employment data for December showed Washington, D.C. growing at just 0.4% year-over-year, the lowest rate of growth among the top 25 office markets covered by CommercialEdge.  

Yet slow growth in traditional office-using sectors only paints a partial picture of the struggles in D.C.’s office industry. Unlike other markets, much of D.C.’s office employment is made up of government workers, and BLS data shows that employment in the federal government sector fell 3.5% in 2022. Further compounding issues for the market, the federal government has embraced remote and hybrid work as well, considering it a competitive advantage in a tight labor market. 

Download the PDF report to view more, including the map for office-using employment growth. 

You can also see our previous office reports. 

Methodology 

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets. 

CommercialEdge collects listing rate and occupancy data using proprietary methods. 

Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge. 

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. 

A and A+/Trophy buildings have been combined for reporting purposes. 

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. 

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries. 

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 office report coincide with the ones defined by Yardi Matrix and may differ from regional boundaries defined by other sources. 

The post Weak Demand, Falling Prices and Potential Distressed Activity Predict Muted Sales for 2023   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. 

The post 2022 Sets Industry Record with 450 Million Square Feet of Deliveries appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $38.19 per square foot, down 0.7% year-over-year 
• Up 90 basis points year-over-year, the national vacancy rate rested at 16.5% 
• Under-construction office space totaled 135 million square feet at the end of the year, with another 261 million square feet in the planning stages  
• 2022 office sales totaled $30 billion less than 2021’s $116 billion volume
• At $930 per square foot, San Francisco remained the unchallenged leader of office sales prices in 2022 
• Construction pipelines in Chicago and the Twin Cities stayed under 1% of their respective local stocks 
• With 8.7% of its stock under construction, Austin continues to lead U.S. office development  
• Manhattan asking rents remained the highest nationwide, closing the year at $76.09 per square foot

Nearly three years after the COVID-19 pandemic upended the office sector, its future remains unsettled. Even as some firms become more forceful in bringing workers back into the office, many have fully committed to hybrid and remote work policies. The CommercialEdge U.S. office market report anticipates 2023 to bring more uncertainty and change in the office sector as it moves towards a post-pandemic status quo.

Higher interest rates are expected to hamper the new supply pipeline as well as transactional activity in 2023. Some buildings in attractive locations will break ground but many projects will be paused or altogether canceled. Higher rates will lead not only to fewer office sales but also to lower prices for properties that do trade.

Additionally, tenants’ flight-to-quality is expected to persist in 2023. Businesses that want employees in the office more often, but do not want to use a heavy-handed approach, are looking for high-quality amenitized space to entice workers to come in, embracing smaller footprints in premium locations.

As a result, developers are focused on increasing the national Class A office supply to support the evolving needs of future tenants. At the end of 2022, Class A and A+ office space under construction totaled nearly 126 million square feet nationally, while Class B space accounted for less than 10 million.

As the flight-to-quality continues, we will be watching to see how much of a role space reduction plays in these leasing decisions, and to what degree coworking becomes an option as a high-quality landing spot.

Peter Kolaczynski, CommercialEdge Senior Manager

Listing Rates & Vacancy: High-Quality Sublease Space Keeps Rates Steady

The average full-service equivalent listing rate was $38.19 in December, down 0.7% year-over-year but up 16 cents over November. At the same time, the national vacancy rate was 16.5% in December, an increase of 90 basis points over the last 12 months.

While U.S. office vacancy rates have risen steadily over the last few years, average listing rates have yet to fall in response. This is because average rates reflect both the quality of space listed as well as underlying fundamentals. With plenty of high-quality space hitting the market in recent years, not only through direct vacancies but subleases as well, average listing rates have managed to hold fairly steady so far.

Top Listings by Metro Area: December 2022

In Seattle, for example, where the sublease vacancy rate is 3.8%, large blocks of space have been listed well above the average market rate. Zillow — which has been hampered by a rapid downturn in the home market and laid off thousands of workers in 2022 — recently listed seven of its 12 leased floors at the Russell Investments Center in the Commercial Business District of Seattle, an A+ building.

Overall, class A and A+ buildings did more than just hold steady as the flight-to-quality trend intensified: In 2022 top tier spaces commanded an average rate of $46.69 nationwide, marking a 1.9% increase over 2021 figures. At the same time, class B rates slid 0.4%.

Moreover, despite the early panic of CBDs being abandoned, it was, in fact, CBD office assets that saw listing rates inch up 2.3% year-over-year, while suburban assets contracted 0.5%. Urban office spaces had an even more noticeable depreciation in listing rates: 2022 closed with rents 4.4% below figures logged at the end of 2021.

Supply: Office Starts Remained High in Select Markets in 2022

Nationally, 135.3 million square feet of office stock were under construction nationally, representing 2.1% of stock. An additional 261.3 million square feet are currently in the planning stages of development, representing 4% of stock. Due to the rising cost of capital, economic uncertainty, and firms permanently reducing their office footprints, many of the projects in the planned portion of the pipeline are expected to be delayed or outright canceled in 2023, according to office real estate outlooks

While new office development has slowed in recent years, developers still seized opportunities to build high-quality, well-located buildings. Austin, for example, was popular with developers last year, as it consistently led the nation in office utilization metrics, while also increasing its labor pool by a significant margin by adding 59,000 office jobs since the start of 2021.

Office Space Under Construction (Million Sq. Ft)

Thus, the Texas capital saw 5.7 million square feet in office starts in 2022, an increase of 2 million square feet over 2021 starts. Among last year’s iconic starts was Waterline, a mixed-use tower that will include 700,000 square feet of office space, and The Republic, a 48-story tower with ground floor retail and more than 50,000 square feet of amenities. Notably, both broke ground in the second half of 2022, further increasing Austin’s already robust pipeline.

Transactions: Sales Slow in Second Half of 2022

CommercialEdge has recorded $83.6 billion in office transactions for 2022, at yearly average of $247 per square foot. A lag in collecting data for all sales means that these numbers are not yet final, but it is certain that last year’s investment volume will be lower than 2021’s $116 billion at an average of $280 per foot.

At the market level, Manhattan remained the leader of the pack, closing more than $6 billion in office sales in 2022, with Boston’s $4.71 billion the next-highest, closely followed by Dallas at $4.66 billion. In terms of pricing, San Francisco also held on to its leading position, with assets here trading at an average $930 per square foot, followed by Manhattan at $733 per square foot and Seattle coming in third at $542 per square foot.

Year-to-Date Sales (Millions)

Houston, Orlando and the Twin Cities stood on the other end of the pricing spectrum among the country’s 25 largest markets in the U.S., with office spaces selling for $132 per square foot, $176 per square foot and $180 per square foot, respectively. Orlando was also among leading markets with more muted sales totals as well. Specifically, Portland, Orlando and Brooklyn closed the year with the smallest sales volumes among leading office markets, totaling $184 million, $667 million and $767 million, respectively.

Looking to the year ahead, office sales will likely be even more muted in 2023 due to rising interest rates and a potential looming recession. Uncertainty will lead to growth in the bid/ask spread, limiting the number of sales until there is more clarity in the evolution of the economy and interest rates.

Sale Prices by Asset Class

Western Markets: Five of the Eight Highest Office Sales Prices Claimed by the West

While Portland did indeed have the lowest sales volume among the county’s top 25 markets at $184 million, leading Western markets closed 2022 with sales volumes that ranged between $2 billion (San Francisco) and $3.39 billion (Los Angeles). The Bay Area was the only other exception besides Portland, closing $4.58 billion in office sales — the fourth largest volume nationwide. It achieved that figure with an average price per square foot of $439, one of the highest not only in the West but nationwide as well.

In fact, western markets claimed five of the eight highest sales prices, including two of the top three. Specifically, Seattle had the third highest price per square foot at $542, and San Francisco remained the unchallenged price leader at $930 per square foot.

Sales Price Per Square Foot

Taking into account the prices claimed by properties traded in these markets, developers have continued to develop office spaces here, with the construction pipelines of both Seattle and San Francisco accounting for 4.2% of their respective stocks. But San Diego’s 4.77 million-square-foot pipeline accounted for 5.1% of its stock — the highest share among markets in the West.

The Bay Area’s under construction and planned office projects now total the equivalent of 16.6% of its existing footprint. Conversely, projects under construction in Phoenix are set to add the equivalent of just 0.6% of the existing local office stock for an increase of 845,000 square feet.

The Bay Area and San Francisco also led in terms of asking rents, with their 2022 averages coming in at $55.89 per square foot and $67.18 per square foot, respectively. Only Manhattan’s $76.09 rate was higher in the entirety of the U.S. Rents in leading western markets were mostly on the rise year-over-year, with Denver the only exception: Rents declined 2% here, stabilizing at $29.89 per square foot at the end of the year.

West Regional Highlights

Of note is also the fact that San Diego continued to stay ahead of Los Angeles, closing 2022 with an asking rate of $43.58 per square foot, compared to Los Angeles average of $42.62 per square foot. In fact, San Diego’s office market outperformed Los Angeles in vacancies as well, posting a slightly lower rate of 14.24%. However, these office vacancy rates were some of the lowest among the country’s top 25 office markets, with Seattle and Denver’s vacant spaces surpassing 18% of the local stock and San Francisco reaching 19.28%.

Midwestern Markets: Chicago Ends 2022 with $3.2 Billion in Office Sales, Despite One of the Lowest Prices per Square Foot

Despite pressures from macroeconomic headwinds and overall weakening office fundamentals, Chicago remained an attractive investment market for investors. Over the past year, the Windy City saw nearly $3.2 billion in closed office deals, despite recording a price per square foot of just $187, one of the lowest across the U.S. In fact, Chicago outpaced only Philadelphia ($186), the Twin Cities ($180), Orlando ($176) and Houston ($132). 

With a price per square foot slightly below Chicago’s, the St. Paul – Minneapolis market registered a more sluggish sales volume in 2022, totaling just over $1.5 billion. Moreover, with the vacancy rate also holding steady in the metro — just below 15% — developers remained cautious about increasing the existing office stock.

In December, the Twin Cities had merely 632,500 square feet of office space under construction, accounting for 0.5% of total inventory, exceeding only Portland’s 416,000 square feet and Tampa’s 344,00-square-foot pipeline. 

Midwest Regional Highlights

Although Chicago is now offering incentives to boost office conversions to housing and other mixed-use properties, the metro had around 2.3 million square feet of office space underway as of December. That accounted for 0.9% of total stock, and with an additional 5.3% in the planning stages. Nonetheless, amid the current market pressures, it remains to be seen how much of that will actually materialize in 2023 and beyond.

While Chicago saw a slight uptick in asking rates on a year-over-year basis, reaching $27.73 per square foot, the metro continued to post one of the lowest rates nationwide. At the same time, listing rates in St. Paul – Minneapolis remained virtually unchanged compared to December 2021 figures, closing 2022 at $26.07 per square foot.

Southern Markets: Office Construction Remains Robust in the South, as Austin’s Pipeline Reaches 8.7% of Its Stock

While the national construction pipeline stood at 2.1% at the end of 2022, Southern markets, especially those in the Sunbelt, continued to lead at much higher rates. In fact, the four largest construction pipelines on a percentage-of-stock basis were in Austin (8.7%), Charlotte (6.3%), Atlanta (6.3%) and Nashville (5.4%). Austin remained the darling of developers looking to increase top tier office space in a market with one of the highest office usages nationwide — one that also saw a significant increase in office sector jobs.

Thus, the Texas capital closed 2022 with the equivalent of 8.7% of its existing stock under construction that will increase Austin’s office footprint by 7.7 million square feet. While a slowdown in development is expected at a national level, the bullishness of industry players regarding this market may result in much of its planned stock also materializing. If all planned projects were to go through, it would further increase Austin’s office footprint by 15%.

Office Space Under Construction & Planned (% of stock)

On the other end of the spectrum stood Tampa, where office projects with shovels in the ground represented 0.5% of the local stock or nearly 344,000 square feet, by far the lowest pipeline among leading office markets. Tampa also had one of the smallest sales volumes in 2022, closing the year with $847 million in office sales. However, Orlando had an even slower sales year, with only $667 million in office deals, outperforming only Portland’s $184 million total.

Moreover, Orlando also had one of the lowest sales prices among the country's top 25 markets with the average office sales price for 2022 coming in at $176 per square foot. Only Houston’s average was lower at a mere $132 per square foot. Meanwhile, Miami and Austin ranked among the 10 priciest office markets in terms of sales prices, with Miami at #9 with an average of $396 per square foot and Austin at #10 with a $380 per square foot average.

South Regional Highlights

In terms of asking rents, Orlando yet again stood out, with its $24.16 per square foot rate, the lowest of the South’s top office markets, despite a fairly robust increase over 2021 figures. The highest asking rents were claimed by Miami, as expected. Its $47 per square foot rate was followed by Washington, D.C.’s $41.42 rate and Austin’s $41.06 average as the only three Southern markets with asking rents north of $40 per square foot.

Vacancy rates remained in the high teens in the South, with Charlotte’s 13.21% vacancy rate the lowest by a significant margin, while Houston’s 25.81% vacancy was the highest. In fact, it continued to increase in 2022, coming in 1.43% higher compared to December 2021. But the highest increase in vacancies unfolded in Austin, where millions of square feet of new space hit the market last year. Taking that into account, a 2.54% year-over-year increase in the local vacancy rate actually signals continued strong demand in the market.

Northeastern Markets: Manhattan Remains Priciest Office Market for Asking Rents by Significant Margin

Manhattan remained the most expensive market for office rents in 2022 as well, closing the year at $76.09 per square foot, following a slight uptick over year-ago figures. In fact, Manhattan asking rents were nearly $9 higher than the next priciest rate, San Francisco’s $67.18, and $20 higher compared to the third highest average asking rent of $55.89 in the Bay Area. Office rents in Boston, New Jersey and Philadelphia stayed in the $30 per square foot range, with Philadelphia’s 2022 average stabilizing at $31.30 per square foot.

Vacancies in the Northeast’s leading office markets remained mostly in the teens, with Brooklyn’s 19.11% the highest. At the same time, Manhattan’s average vacancy rate grew at the region’s fastest pace: 2.41% year-over-year.

Manhattan also closed 2022 with the largest development pipeline in terms of square feet, with 13 million square feet under construction, representing 2.8% of its existing stock. Although intensifying headwinds mean it's unlikely that the additional 2.2% of planned office projects will all materialize. Boston was close behind with its 12.69 million square feet of under-construction office space that are set to boost the existing office stock by 5.3%, with another 6.2% in the planning stages.

Northeast Regional Highlights

Manhattan also claimed the largest sales volume nationwide, accounting for $6 billion of the $83.6 billion national total. Boston boasted the second largest volume, totaling $4.7 billion in office sales, while New Jersey amassed $3.6 billion over the course of the year. Conversely, Brooklyn’s transactional sector was the third- slowest among leading markets, closing $767 million in office sales, despite a $532 per square foot sales price. In fact, Philadelphia’s $1.16 billion sales total was double that of Brooklyn, even as it featured one of the lower sales prices of $186 per square foot.

Office-Using Employment: Office Jobs Decline in December

Office-using sectors of the labor markets lost 6,000 jobs in December, according to the Bureau of Labor Statistics, marking the second monthly decrease since the onset of the pandemic in early 2020. Overall, financial activities gained 5,000 jobs in December 2022, but information lost 5,000 positions, while professional and business services lost another 6,000.

However, the downward trend has been apparent in most of the second half of 2022. From April 2021 through September of 2022, year-over-year office job growth was higher than 4% every month but fell to just 2.6% in December.

At the same time, between January 2021 and July of 2022, the office sector added an average of 117,000 jobs a month. But in the last five months, they have averaged only 25,000 jobs per month. This is yet another unfortunate development for the office industry, which needs job creation to replace demand that disappeared due to remote and hybrid work.

Office-Using Employment Growth by Sector

Despite the murky picture on a national level, some markets — mainly in the Sunbelt — continue to see robust growth in office employment. Metro data for the month of November, which trails the national release, showed strong annual growth in Dallas (6.4%), Atlanta (6.1%) San Francisco (6.0%) and Charlotte (5.9%).

While some regional markets allow for careful optimism, office-using employment will likely further decelerate as tech layoffs bleed into 2023 and a potential recession emerges. However, even with the recent woes of the tech sector, giants like Apple and Twitter, as well as other tech companies, have shied away from fully remote work, allowing for a potentially more positive office market outlook.

Trends & Industry News: Tech Lays Off Workers and Downsizes Offices

Interest in conversions of office buildings into residential and mixed-used properties will likely remain high in 2023 but projects may continue to struggle to gain traction. With offices vacant and housing in short supply across the county, converting offices seems like a logical solution.

However, many offices are ill-suited to conversions and without tax incentives and other financial resources from state and local governments, many projects may not pencil out in a high-interest-rate environment. Chicago was among cities that promised such incentives while soliciting bids for conversions of office buildings on La Street Corridor. It got nine proposals totaling $1.2 billion for a wide array of uses, from housing to an e-sports gaming arena.

National New Supply Completed & Forecast

Looking ahead to other trends for the year, demand for coworking will continue to grow in 2023, CommercialEdge’s U.S. office market report predicts Even with hybrid and remote work becoming prominent, most firms still want office space for face-to-face collaboration, trainings, and team building.

Flex spaces provide this without the long-term commitment of a traditional office lease. As a result, in 2023, demand will lead to growth not only for traditional coworking providers but will likely also lead to further flex space offerings from brokerages and office owners that are looking to increase occupancy and cash flow.

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports.

Methodology

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge.
• 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.
• A and A+/Trophy buildings have been combined for reporting purposes.

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 have begun.

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.

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.

The post U.S. Office Market Closes 2022 with Still-Rising Vacancies & Declining Sales appeared first on CommercialEdge.

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.

• The average U.S. office listing rate stood at $38.06 per square foot, down 3.1% year-over-year
• Up 110 basis points year-over-year, the national vacancy rate rested at 16.2%
• Under-construction office space totaled 132 million square feet in November
• $80.4 billion in office sales were closed in the first 11 months of the year
• Seattle moved forward with 5.6 million in office projects despite tech layoff challenges
• At $124 per square foot, Twin Cities’ sales price remained the lowest among leading office markets
• With a sales volume of $3.66 billion, Atlanta was on track to surpass 2021 totals
• Manhattan vacancies still rising but the market still commanded the nation’s highest asking rent at $75 per square foot

Trends & Industry News: Tech Lays Off Workers and Downsizes Offices

Fueled by an abundance of cheap capital and investor search for yield, tech companies rapidly expanded in recent years, hiring thousands of workers as they competed for talent. This year, those companies have reversed course and begun to shrink their payrolls.

However, tech companies have not only been laying off workers in an effort to cut costs but are also downsizing office footprints, especially in gateway markets, data from CommercialEdge’s latest U.S. office market report reveals. Meta, for example, has already given up its presence at four office buildings and is set to give up its presence at two more — and this only since its third-quarter earnings call.

We’re paying close attention to WFO policy announcements and whether companies follow through with implementation, or if they continue to kick the proverbial can down the road.

Peter Kolaczynski, CommercialEdge Senior Manager

With so many headwinds already facing the office sector, the tech pullback is yet another headache, putting upward pressure on U.S. vacancy rates. An industry that was a major driver of office leasing in recent years is now reversing course, but there are some silver linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies both small and large have eschewed fully remote work, meaning that tech will still be an important demand driver, allowing for a more optimistic office real estate outlook for 2023.

Listing Rates and Vacancy: National Vacancy Rises 110 Basis Points Year-Over-Year

The U.S. office vacancy rate was 16.2% at the end of November, an increase of 110 basis points over the last twelve months and 10 basis points higher than in October. Considering the large scale of layoffs and rapid pace of office downsizing and consolidation in the tech industry — one of the most important drivers of office demand and office use in the past decade — vacancies could rise further, especially in markets with a heavy tech presence. After all, as previously reported, vacancies rose in 86 of the 120 markets covered by CommercialEdge, according to last month’s U.S. office market report.

Top Listings by Metro Area: November 2022

Meta, for example, will take a $2 billion write down to consolidate offices across some of the largest office markets in the U.S., mainly by subleasing space and backing out of lease commitments, including recent ones. For example, in Austin, Meta will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year. In Silicon Valley, it vacated The Village at San Antonio Center, while in NYC Meta is set to give up its footprint at four addresses.

But it’s not just Meta downsizing office footprints: Salesforce will sublease around 40% of its 43 floors at Salesforce Tower in San Francisco, while Lyft plans to sublease about 45% of its presence across New York, Seattle, Nashville and San Francisco.

Price Per Square Foot by Asset Class

At the same time, the average full-service equivalent listing rate was $38.06 in November, down 3.1% year-over-year but up 12 cents over October. That decrease was mostly fueled by negative growth for Class B and Class C spaces, as Class A and A+ office rates were up 1.6% for an average $46.96 per square foot. Specifically, Class B offices recorded a 6.0% decrease for an average rate of $30.30 per square foot, while listing rates for Class C spaces contracted 12.9% year-over-year, closing November at an average $23.05 per square foot.

In terms of location, rates for CBD spaces recorded a 0.2% year-over-year decrease in listing rates for an average of $50.87 per square foot. At the same time, suburban buildings saw listing rates decrease 4.2% year-over-year, closing November at $30.33 per square foot. Urban offices were being leased at an average of $44.70 per square foot following a 4.4% contraction over the past 12 months.

Supply: Office Sector on Track to Surpass 2021 New Start Figures

Nationally, 132.3 million square feet of office space was under construction at the end of October, the equivalent of 2.1% of existing stock. Another 6.3% were in the planning stages, despite continuously weakening office occupancy rates, driven by challenges such as hybrid work, rising costs of capital and a potential looming recession.

Office Space Under Construction & Planned

In fact, the office sector is on track to have more square feet of starts in 2022 than last year, despite cancellations and postponements from large tech players. For example, Amazon halted the construction of new office buildings in Nashville and Bellevue. However, through November, nearly 56 million square feet of new office space began construction. By comparison, in 2021, a total of 58.2 million square feet of space started construction.

Transactions: Average National Sale Price Hovers at $253 per Square Foot

CommercialEdge has recorded $80.4 billion in office transactions through the first 11 months of the year. Of this, Manhattan alone accounted for $5.88 billion and was the only market to surpass $5 billion in sales. However, Boston, the Bay Area, Washington, D.C. and Dallas each recorded more than $4 billion.

Year-to-Date Sales (Millions)

While Atlanta didn’t surpass the $4 billion threshold, its $3.66 billion sales volume still made it stand out as the market is on track to surpass last year’s total of $3.7 billion. Not only that, but it’s also one of the few markets where the average sale price has increased this year. from $211 per square foot in 2021 to $229. However, San Francisco remains by far the national price leader at $940 per square foot. For comparison, the year-to-date average national sale price stood at $253 per square foot at the end of November.

Western Markets: Seattle Pipeline Large Despite Challenges

Despite a slowdown in the tech industry, which makes up an outsized portion of the market's office utilization, the new supply pipeline in Seattle remains substantial. More than 5.6 million square feet are under construction in the Emerald City, 1.3 million of which began construction in 2022. Tech layoffs in the market have been widespread, from giants like Amazon and Meta to real estate tech firms Redfin and Zillow, which will put some downward pressure on office demand and occupancy rates.

Yet, despite job losses in high-profile tech companies, office-using sectors of the labor market in Seattle have grown 6.5% year-over-year according to the Bureau of Labor Statistics. But with a vacancy rate that has increased 140 basis points over the last year and now sits at 18.1%, absorption of this new stock could take a while.

Especially considering that layoffs are being paired with office downsizing: Lyft announced it will sublease about 45% of its office footprint across San Francisco, New York, Seattle and Nashville. Salesforce too is looking to sublease around 40% of its 43 floors at Salesforce Tower in San Francisco — a market still struggling with one of the highest vacancy rates among the country’s top office markets. In fact, its 19.06% vacancy rate is the highest on the West Coast, as is its 4% year-over-year increase in vacancies.

Following close behind San Francisco was Denver with the next-highest vacancy rate (18.71%) and the next-highest increase in that rate (2.66%). The lowest vacancy rate (14.48%) on the West Coast was registered in San Diego which does have a significant life science sector, while the Bay Area — another region with a healthy life sciences industry — recorded the lowest increase in vacancies over the past 12 months at just 0.07%.

Despite its high vacancy rate, San Francisco still commands the highest asking rent on the West Coast. In fact, its $67.03 per square foot rate was second only to Manhattan on a national level. Next up, the Bay Area stood at $55.75 per square foot, followed by San Diego at $43.72 per square foot, maintaining its recently gained lead over Los Angeles, now at $42.09 per square foot.

West Regional Highlights

In terms of sales, the Bay Area remained by far the leader of the West Coast with a sales volume of $4.42 billion, with Los Angeles’ $3.28 billion sales total the next highest. However, San Francisco still commanded the highest year-to-date price per square foot by a vast margin, coming in at $940 per square foot. Seattle’s $550 per square foot rate was the next highest. At the same time, San Diego further stood out, having reached a $448 per square foot year-to-date sale price, surpassing the Bay Area by $6 and Los Angeles by $15.

Midwestern Markets: Chicago & Twin Cities Post Some of the Lowest Asking Rents Among Leading Markets

Chicago continued to have one of the most robust sales markets in the country, closing $3.15 billion in office sales year-to-date. In fact, it closed $270 million in office sales since last month, climbing one position to become the ninth-hottest sales market for office assets nationwide. And it did so with one of the lowest prices per square foot among leading U.S. office markets: Only Philadelphia, Orlando, Houston and the Twin Cities had a lower price than Chicago’s $186 per square foot rate.

Midwest Regional Highlights

The Twin Cities’ $124 per square foot was the lowest sales price among the top 25 office markets, while its $978 million sales volume was also among the lowest nationwide. The Twin Cities also had one of the lowest construction pipelines at 569,500 square feet, with only Tampa’s 343,773-square-foot pipeline lower.

While the Minneapolis – St. Paul market had the equivalent of 0.5% of its existing footprint under construction, Chicago’s nearly 3 million-square-foot pipeline accounted for 1% of its existing stock, with an additional 6.63% in the planning stages. Chicago also had one of the highest vacancy rates nationwide at 19.35%, but that rate has increased very little over the past 12 months, rising only 0.33%.

Asking rates have been on the rise in the Windy City, but Chicago’s $27.89 per square foot listing rate was one of the lowest among the country’s top markets. The same was true for the Twin Cities’ $26.13 per square foot rent rate.

Southern Markets: Austin Market Strong Despite Rising Vacancies

Austin has been the fastest-growing office market in the country since the start of the pandemic, with office-using sectors of the labor market adding 85,000 jobs (an increase of 28%) in the last 30 months. Developers have responded to this growth, with more than 3.1 million square feet of new office space, representing 3.6% of stock, completed this year alone.

With deliveries hitting the market at this pace, the 100-basis-point increase in vacancy rates over the past 12 months appears minor. The same can be said about Meta’s downsize in this hot office market: The tech giant will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year.

South Regional Highlights

Despite being one of the strongest office markets in the country, Austin’s average full-service-equivalent listing rate has fallen 3.3% over the past 12 months. This was in part due to numerous listings hitting the market at a rate lower than the market average, bringing Austin’s average asking rate to $41.81 per square foot. But Austin also had the largest supply pipelines in the country on a percentage-of-stock basis, with the equivalent of 8.8% under construction. Not only that, but planned projects would further increase its stock by 22.8%.

Atlanta too, stood out from the pack when it comes to office sales in 2022. Not only is the market on track to surpass last year’s sales volume of $3.7 billion but it is one of the few markets where the average sale price has increased this year, rising to $229 from $211 per square foot in 2021. The sale of the 1.3 million-square-foot Bank of America Plaza — a 55-story tower that is an iconic part of the city’s skyline — has been the largest this year.

Nashville is also among the cities with notable tech downsizing. Specifically, Amazon halted construction of a new office building in Nashville, while Lyft’s 45% sublease of its footprint will also include space reductions in Music City. Currently, Tennessee’s top office market has a vacancy rate of 17.80%, having inched down just 0.11% over the past year. At the same time though, asking rents rose a little over 3% year-over-year, bringing the average rate to $31.20 per square foot.

Meanwhile Miami continued to see rapid increases in office rents, with its average asking rate reaching $49.62 per square foot for the priciest market in the South. Austin and Washington, D.C. were the next priciest markets in the region with average rents of $41.81 per square foot and $41.53 per square foot, respectively.

Washington, D.C. also stood out in terms of sales: At $4.29 billion, the capital had the largest sales volume in the South and the fourth-highest nationwide. Dallas and Atlanta followed close behind with sales volumes of $4.16 billion and $3.66 billion, respectively. In fact, Dallas had the fifth largest office sales volume nationwide, having reached that position with one of the lowest prices per square foot. Its $187 year-to-date sales price outperformed only Chicago, Philadelphia, Houston, Orlando and the Twin Cities.

Northeastern Markets: Meta Downsize Targets Four Manhattan Office Buildings

The ongoing tech downsize was bound to also make its presence felt in the Northeast, specifically New York City. Lyft is set to cut its office footprint by 45% across four cities, including NYC, while Meta is looking at reducing its footprint at four addresses by subleasing space and backing out of lease commitments.

In fact, the tech giant said on its third-quarter earnings call that it will take a $2 billion write down to consolidate offices across multiple locations in the U.S. In Manhattan, the firm has backed out of a 300,000 square-foot commitment at 770 Broadway, vacated its space at 225 Park Avenue, and will not renew leases at two buildings in Hudson Yards.

Manhattan closed November with a vacancy rate of 14.83%, having risen 3.46% over the past 12 months, while Brooklyn stood at 17.70%. New Jersey too had a similarly high vacancy rate at 17.47%, while its average asking rent stood at $32.99 per square foot, having slipped 0.54% year-over-year.

Boston, as one of the markets with the lowest vacancy rates on the East Coast, closed November at $37.52 per square foot after inching up 0.36% year-over-year. Manhattan, of course, still commands the highest asking rents in the U.S. at $74.73 per square foot, but rates have continued to slip, coming in 4.27% below year-ago levels.

Northeast Regional Highlights

Despite high vacancy rates, Manhattan developments are still continuing: More than 15 million square feet of office space are under construction, the equivalent of 3.4% of its existing stock. Another 5.9% were on the drawing board at the end of November. Boston had a similarly large development pipeline at more than 13 million square feet, which will increase the city’s office footprint by 5.6%. And if all planned projects materialize, Boston will add the equivalent of another 11.8% of space.

Boston also performed well when it came to sales, closing $4.66 billion in office sales year-to-date for the second-highest volume nationwide. It was, of course, surpassed only by Manhattan’s $5.89 billion sales volume. Manhattan achieved that figure with a year-to-date price per square foot of $828, surpassed only by San Francisco’s $940 rate.

And while Brooklyn had one of the lowest sales volumes among leading office markets with a total of just $767 million, it still commanded one of the highest prices at $532 per square foot. Meanwhile, New Jersey had the seventh highest sales volume nationally, with its $3.41 billion total surpassing Los Angeles, despite having a much lower price per square foot: $231 versus $434.

Office-Using Employment: Job Growth Cools in Office Sectors

Office-using sectors of the labor market added 39,000 jobs in the month of October. The three sectors have seen growth slow in recent months after starting the year strong. Between January and July, more than 108,000 office jobs were added per month on average. August through October, the average has been slightly north of 41,000.

Metro employment data for September, which trails the national release, shows the Sunbelt leading the way in office jobs growth, with Dallas increasing 8.0% over the last year, Atlanta 7.7% and Charlotte 7.2%, Austin 6.2% and Nashville 5.7%. Gateway and tech-centric markets have also seen large gains year-over-year with San Francisco growing 7.0%, Seattle 6.5%, New York 5.8% and Boston 5.0%.

Office-Using Employment Growth by Sector

However, unlike the Sunbelt markets at the top of the list, gateway markets have been slow to recover jobs lost to the pandemic, finally surpassing February 2020 levels of employment this year, whereas the Sunbelt markets have long since recovered and continued to grow in 2022.

At the same time, however, layoffs in the tech industry have been widespread, even as other sectors of the labor market have added workers. According to Layoffs.fyi, more than 130,000 tech layoffs have occurred across nearly 1,000 tech firms since the second quarter. The list of companies with large-scale layoffs this year reads like a who’s who of last decade’s tech darlings. Among the biggest names, Meta is laying off 11,000 employees, Amazon is dropping 10,000 and Twitter has cut more than half of its staff. Uber laid off more than 3,000 and Snap is planning to let go a fifth of its workers.

With so many headwinds already facing the office sector, the tech pullback is yet another headache. An industry that was a major driver of office lease in recent years is now reversing course, but there are some silver-linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies, both small and large, have eschewed fully remote work, giving space for a brighter office market outlook. Long term, laid-off tech employees may find new businesses that drive office demand in the later half of this decade, much like they did in the rebound from the Great Financial Crisis.

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports.

Methodology

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge.
• 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.
• A and A+/Trophy buildings have been combined for reporting purposes.

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 have begun.

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.

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.

The post Tech Sector Downsize Further Challenges Office Recovery   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.

• The average U.S. office listing rate stood at $37.94 per square foot, down 0.1% year-over-year
• Up 150 basis points year-over-year, the national vacancy rate rested at 16.3%
• Under-construction office space totaled 135.5 million square feet in October
• $76.3 billion in office sales were closed in the first 10 months of the year
• At $940 per square foot, San Francisco claims highest office sales price in the U.S.
• Midwest posts lowest office sales price with Twin Cities’ $123 per square foot
• Atlanta and Houston post highest vacancy rates, with both north of 20%
• Manhattan still leads asking rents with $74.75 per square foot

Although many industry players and occupiers hoped for 2022 to be the year when the office market levels out and maybe even starts to recoup pandemic losses, that stabilization did not materialize. Wider economic shifts, the Federal Reserve’s repeated interest rate hikes, the further solidification of work from home and office setups and increasing office footprint reductions by companies meant that vacancy rates continued to rise throughout the year, while rent growth remained patchy.

Work-from-home solidifying itself, plus broader economic uncertainty, are set to continue the stress on the office industry as we enter the new year.

Peter Kolaczynski, CommercialEdge Senior Manager

Listing Rates & Vacancy: Listing Rates Register Significant Growth Only in Select Market

With large swaths of the office-using sector embracing remote and hybrid work at least partially, demand for office has continued to decline in most markets since the onset of the pandemic.  Not only that, but many companies have already reduced their office footprints, while others have concrete plans to do so in the near future.

As a result, the national vacancy rate was 150 basis points higher than in October 2021, closing last month at 16.3%.

In fact, over the past 12 months vacancy rates rose in 86 of the 120 markets covered by CommercialEdge, including in 22 of the 25 most important ones. Of the leading U.S. office markets, the sharpest vacancy rate increases were recorded in Portland (+400 bps) and San Francisco (+390 bps). On the other end of the spectrum, only three of the country’s 25 leading markets saw vacancies decline during the same time period: Boston, Charlotte and Washington, D.C.

Top Listings by Metro Area: October 2022

Across the top 50 U.S. office markets, the average full-service equivalent listing rate stood at $37.94 in October, down 0.1% year-over-year. Considering the significant vacancy declines recorded in Charlotte and Boston, it was to be expected that the two markets would also have some of the most robust listing rate growths in the U.S.

Specifically, the increase in Charlotte’s and Boston’s listing rates were among the three highest in the U.S. In fact, Charlotte and Boston were two of only four markets where listing rates appreciated by double digits over the past 12 months, joined by San Diego and Miami. Growth in these locations was driven by robust life science sectors and increases in in-migration of workers and companies to Sunbelt markets.

Supply: Sunbelt Adds Space as Firms Seek Headquarters

Nationally, 135.5 million square feet of office space was under construction at the end of October, the equivalent of 2.1% of existing stock. Another 6.1% are in the planning stages, but it remains to be seen if they will indeed materialize considering the increased cost of construction materials, supply chain issues, the significant interest rate hikes handed down by the Fed, the increased cost and difficulty of financing and a potential recession.

Although office construction is nowhere near pre-pandemic levels, development has continued over the past 30 months. With the overwhelming majority of office projects that broke ground before the pandemic having been delivered, 80% of the current construction pipeline consists of developments that kicked off after April 2020. Much of the current national construction pipeline is driven by occupiers’ flight to quality and by companies relocating to or expanding into Sunbelt markets.

Specifically, of the 135.5 million square feet of office space currently under construction, 125.7 million square feet are represented by A and A+ projects, with class B spaces accounting for less than 10 million square feet.

Asset Class Price Per Square Foot

Driven by heavy migration into the region over the last few years, Sunbelt markets — especially in the Southeast — have been among the most active when it comes to new office development.

Charlotte and Miami have especially attracted firms looking to relocate or expand, with the former breaking ground on the equivalent of 7.4% of its stock since the start of this year alone. Although some projects have been scrapped over the past few months, the city’s development pipeline is second only to Austin, a market where office is undergoing a veritable boom, with projects currently under construction set to increase its footprint by 8.1%.

Transactions: National Sales Volume Surpasses $75 Billion

CommercialEdge has recorded $76.34 billion in office transactions between January 1 and October 31. Of this, Manhattan sales represented $5.56 billion, while the Bay Area, Boston, New Jersey and Washington D.C. totaling about $4.1 billion in sales each.

Four more markets surpassed $3 billion in sales, with some expected to surpass the $34 billion marker before the year is out. Among them is Dallas, which had a year-to-date sales volume of $3.94 billion at the end of October. Overall, of the country’s leading 25 office markets, only four had sales volumes under $1 billion.

Year-to-Date Sales (Millions)

Among the hottest office markets for transactional activity, Boston has been the third most active market this year by sales volume, largely driven by life sciences. The two largest transactions in the market were in Kendall Square, both with life science elements. Alexandria sold 70% of its stake in 100 Binney, a recapitalization that valued the building — with tenants like Meta and Bristol Myers Squibb alongside biotech firms — at more than $1 billion. Down the street, Biogen sold its property at 300 Binney for $603 million to Boston Properties in a sale-leaseback.

Although Boston and the Bay Area posted year-to-date sales prices of over $400 per square foot and Manhattan at well over $800 per square foot, the national year-to-date price per square foot clocked in at $261.

Western Markets: San Francisco Remains Priciest Sales Market

San Francisco continues to lead western markets in terms of asking rents, posting a rate of $66.75 per square foot in October — more than double the national average. While asking rents remained unchanged month-over-month, San Francisco’s vacancy rate declined a minute 0.18% compared to September figures. However, year-over-year, the local vacancy rate increased nearly 4%, resulting in a 19.5% vacancy rate at the end of October.

In terms of rent rates, the Bay Area followed with $55.64 per square-foot, up a near-negligible 0.04% year-over-year. But vacancies rose 0.30% during the same timeframe, bringing the Bay Area’s vacancy rate to 16%.

San Diego’s life sciences sector continued to keep asking rents higher than those in Los Angeles. Specifically, double-digit rent growth in San Diego brought rents to a $43.91 per square foot asking rate, while Los Angeles stood at $42.70 per square foot. Moreover, as vacancies in Los Angeles rose nearly 2% year-over-year, San Diego’s 1.16% increase allowed the city to post a lower vacancy rate of 14.53%, the lowest among leading Western markets.

At the same time, Denver was second only to San Francisco in terms of vacancies, with Colorado’s main office market at 18.48%. Asking rents were also declining, decreasing 0.92% year-over-year to close October at $30.02 per square foot. However, this was one of the highest rent rates in the West outside California, with Seattle’s $37.18 per square foot, the highest.

West Regional Highlights

San Francisco was the leader of sale prices as well, posting a $940 per square foot sales price for the first ten months of the year — the nation’s highest. Its closest rival was Manhattan with a price per square foot nearly $100 lower. Seattle sported the West’s second-highest sale price at $573 per square foot, followed by the Bay Area’s $442. Conversely, at $191 per square foot, Portland had one of the lowest sales prices rates among the country’s top office markets.

In terms of sales volumes, the Bay Area led Western markets with $4.18 billion in office sales year-to-date, followed by Los Angeles with $3.1 billion and Denver with $3.03 billion.

Midwestern Markets: Twin Cities Post Lowest Sales Price of the 25 Top Office Markets

Although Chicago had one of the more robust sales markets earlier this year, transactional activity slowed somewhat. Thus, Chicago had the tenth largest sales volumes in the U.S. at $2.88 billion. But the Windy City also had one of the lowest prices per square foot among the country’s 25 most important markets, with its year-to-date sale price at $198 per square foot.

However, the Twin Cities actually had the lowest sales price among the top U.S. office markets, closing October at $123 per square foot year-to-date. The Minneapolis – St. Paul market was also one of five of the country’s top markets where sales had yet to reach $1 billion, totaling $840 million over the first ten months of the year.

The Midwest’s two leading markets also had some of the smallest construction pipelines in the U.S. on a percentage-of-stock basis. Chicago was developing the equivalent of just 1% of its existing footprint at the end of October, while the Twin Cities were expanding by a mere 0.5%. In fact, the Twin Cities’ under construction pipeline was also among the smallest overall, even in terms of square footage, with just 569,000 square feet worth of development with shovels in the ground.

Midwest Regional Highlights

Asking rates in the two markets were fairly close in value, although Chicago still stayed ahead at $27.55 per square foot, down 0.11% year-over-year. Rents in the Twin cities declined at a sharper rate, pulling the local asking rent down to $25.62 per square foot. These were, in fact, some of the lowest asking rents among the country’s top office markets, with only Orlando’s $23.67 per square foot lower.

As for vacancies, Chicago’s 19.74% was the country’s third-highest office vacancy rate, up 1.19% over year-ago figures. Vacancies may have been lower in the Twin Cities, but here too, the trend was one of declining occupancies.

Southern Markets: Houston and Atlanta Vacancy Rates Highest Among Leading U.S. Office Markets

Vacancies rose in the South too, with Houston undergoing the sharpest increase that also resulted in the highest vacancy rate across the U.S. at 25.16%, while Atlanta’s 21.08% was the second highest. However, the South also posted some of the lowest vacancy rates nationwide with Charlotte’s 12.50% and Miami’s 12.72%.

Similarly, Charlotte and Miami, joined by Orlando, also logged some of the highest rent increases over the past 12 months. Other leading markets in the South registered milder decreases, like Houston’s 0.71% decline, or logged small increases in asking rents, such as Nashville’s 0.21% or Atlanta’s 2.51%.

South Regional Highlights

Sale prices in the South could not compete with those of leading Western and Northeastern markets. Miami claimed the highest rates at $390 per square foot year-to-date, followed by Austin’s $387 per square foot and Charlotte’s $322 per square foot. Conversely, some of the lowest sales prices were also logged in the South as Houston’s $160 per square foot and Orlando’s $177 per square foot rates among the three lowest.

But large sales volumes were still reached in the region: Washington, D.C. totaled $4.11 billion in year-to-date sales for the fifth highest sales volume. It was immediately followed by Dallas and Atlanta with sales totals of $3.94 billion and $3.45 billion. And, despite one of the lowest prices per square foot among the country’s leading office markets, Houston still amassed a $2.46 billion total volume. On the other hand, Tampa and Orlando had two of the five lowest sales volumes, logging $769 million and $581 million, respectively.

Northeastern Markets: Manhattan’s Asking Rents Highest in the Country

Nationally, Manhattan, Boston and New Jersey had three of the five most robust sales markets, with all three closing more than $4 billion in office transactions year-to-date. Manhattan remained the national leader and the only market to go north of $5 billion, reaching a total sale volume of $5.56 billion. At the same time, Boston had the third-largest sales volume at $4.18 billion and New Jersey totaled $4.13 billion, the fourth largest.

On the other end of the spectrum, Brooklyn was one of five leading markets where year-to-date office sales remained under $1 billion, totaling $767 million. While Philadelphia inched over that threshold to reach $1.1 billion in office sales, it had one of the lowest year-to-date sales prices at $190 per square foot. Conversely, Manhattan remained one of the most expensive office markets, with assets trading at $845 per square foot, the second-highest rate, while Brooklyn’s $532 per square foot sale price was the fourth highest.

Northeast Regional Highlights

Manhattan asking rents remained the most expensive across the country at $74.75 per square foot. Although Manhattan rates were trending down, barring any radical market shifts, it will likely remain the priciest office market for occupiers for some time yet. While Brooklyn rates trended down overall, Boston’s life science market helped lift rents over the past 12 months. Thus, the market closed October at $40.20 per square foot, almost on par with Austin and Washington D.C.

And although New Jersey commands some of the highest industrial rents in the U.S., office rates here were on the lower end of the pricing scale at $33.15 per square foot. Philadelphia was not far behind at $30.76, but in terms of vacancy rates, it had one of the lowest at 14.22%, with only Boston’s rate lower on the Eastern seaboard. Manhattan’s vacancy rate stood at 14.62%, rising 3.5% year-over-year. Brooklyn also underwent a comparable increase in vacancies, but closed October at nearly 20% vacant.

Office-Using Employment: Finance Wage Growth Lags Other Sectors

Office-using sectors of the labor market added 46,000 jobs in October, increasing 3.6% over the last 12 months, according to the Bureau of Labor Statistics. Year-to-date, office-using sectors have added a total of 910,000 jobs.

After increasing rapidly in the first half of 2021 — peaking at 7.8% year-over-year in March — wage growth in the financial activities sector has withered in the last 18 months. In October, the average wage in the financial activities sector grew just 3.8% year-over-year. This is below the wage growth in the overall labor market (4.7%) and two other office-using sectors, with the information sector increasing 6.4% and professional and business services growing 5.0%.

Wage growth is likely to continue across all sectors in the near term because, despite recent gains, inflation-adjusted wages have fallen this year, with the consumer price index sitting above 8.0% for many months. A tight labor market will necessitate further increases if employers wish to attract and retain talent.

Office-Using Employment Growth by Sector

Trends & Industry News: Rate Increases Another Challenge for Office

In an effort to combat inflation levels not seen in nearly 40 years, the Federal Reserve has raised interest rates 375 basis points since March. For an office market already facing the headwinds of remote work and corporate downsizing, rate increases have added another challenge that will hinder the new-supply pipeline and transaction deal flow.

On top of volatility in material costs and labor shortages, increasing debt costs make deals for new office supply increasingly difficult to pencil out. Build-to-suit or pre-leased properties will still get financing, but not much else. We expect some office projects to be paused or canceled in 2023 as the market adjusts to the new conditions.

Some developers may even look at alternative uses for plots of land they are developing. Last month, CIM Group submitted paperwork to build a 46-story apartment property in downtown Oakland where it had previously planned to construct an office tower.

Lenders are becoming more selective given market conditions, and when they do originate loans for commercial real estate, the multifamily and industrial sectors are preferred over office. Buyers are now looking for discounted prices, but so far sellers are hesitant to reduce them. The bid-ask spread on office properties will likely grow in coming months and deal flow could slow to a trickle.

Sales Price Per Square Foot

For investors that have recently reached the end of their hold period, it is an especially tricky time. While some may be tempted to hold and reassess until rates decrease, that may take a few years, and owners may be holding onto properties with worse lease situations than they have today.

Some of these challenges may ease when inflation cools, and rate hikes taper off. Right now, investors, developers and debt markets are unsure how far the Fed will go with rate increases and when a recession may hit. Once rates stabilize, deal flow and loans for new construction may increase as investors and developers have more certainty about debt costs.

However, by that point the federal funds rate may be higher than it has been in two decades. Combined with the other challenges impacting the office sector since the onset of the pandemic, we expect that deals may only get done for well-positioned, high-quality assets. Additionally, we expect an increase in office space in mixed-use properties as a means to diversify income streams and reduce risk.

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports.

Methodology

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge.
• 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.
• A and A+/Trophy buildings have been combined for reporting purposes.

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.

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.

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.

The post Office Vacancy Rates Continue to Climb Across the Country in 2022 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. office listing rate stood at $37.67, ticking down 2.4% year-over-year
• Up 180 basis points year-on-year, the national vacancy rate rested at 16.6%
• Under-construction office space totaled 139.1 million square feet in September
• $69.3 billion in office sales were closed in the first three quarters of the year

Office starts are undeniably below pre-COVID levels, but the dramatic crash predicted by some has not occurred so far: 46.6 million square feet of new office space broke ground this year, with the expectation that 2022 will match last year’s 62 million square feet of new stock brought to market.  

However, as the office sector rebalances to post-pandemic conditions, new developments exemplify the ongoing geographical and property class shifts in the sector. Gateway markets such as San Francisco, Washington, D.C., and Chicago are adding new office space at a noticeably slower pace, while Sunbelt markets continue to experience only moderate decreases or a veritable office boom:  new and planned office starts in Austin, Charlotte and Nashville will increase local stocks by 15% to 23%. 

Additionally, CBDs are no longer the preferred location for new starts, supplanted by urban projects outside the central core. Specifically, under construction and planned office projects in CBDs will increase the national stock by 4.3%, while urban starts will add the equivalent of 13%. 

The vacancy rate for September stood at 16.6% and will likely rise as fewer leases are renewed. But even so, new office developments continue to break ground as the flight to quality proceeds to intensify. Class A and A+ office starts totaled 130 million square feet at the end of the first three quarters of the year, while Class B accounted for less than 10 million. 

Listing Rates and Vacancy: Trophy Tower Drives Miami Listing Rate Growth

While the office market readjusts to tenants’ flight to quality and the imbalance between diminished demand versus excess availability of space, vacancies continue to rise at the national level, while listing rates slip. Specifically, across the top 50 U.S. office markets, the average full-service equivalent listing rate was $37.67 in September, down 2.4% year-over-year. 

At the same time, the national vacancy rate was 180 basis points over September 2021, closing the month at 16.6%. 

While average listing rates have fallen and vacancies have spiked in many markets over the last year, that is not the case in Miami. Fueled by the relocation of firms and workers to Florida during the last two years, the city sports a 12.1% vacancy rate, while its average listing rate has risen 12.4% over the last twelve months.

Listings by Metro Area: October 2022

The property pushing up rates the most in Miami is 830 Brickell, a 57-floor trophy tower set to deliver before the year is out. Currently the building is listing more than 185,000 square feet, with full-service leases priced from $83 to $150 per square foot. The building has already inked leases with a variety of tenants, from international law firms and asset management companies to Microsoft, which will make the space its new regional headquarters.

Supply: Office Starts Fall in Gateway Markets

Nationally, 139.1 million square feet of new office supply are currently under construction.

In 2022, 46.6 million square feet of new office space have started construction, and the year is on pace to match 2021’s 62.2 million square feet. While the new supply pipeline will not produce starts at pre-pandemic levels — routinely north of 80 million square feet annually —anytime soon, office starts have not dropped coming out of the pandemic as much as expected.

Office Space Under Construction (Million Sq. Ft)

Since COVID-19 began, the geographic composition of office starts has shifted and gateway markets have recorded the largest declines.

Office Space Under Construction & Planned

In 2019, Los Angeles had 3.6 million square feet of starts, but this year only 61,000 square feet of non-owner-occupied office space has begun construction. Chicago started 1.0 million square feet year-to-date in 2022, compared to 5.0 million three years ago. New projects in Manhattan have declined from 3.2 million square feet to just 754,000 this year, while Washington, D.C.’s volume has dropped from 4.7 million square feet to 1.1 million.

National New Supply Forecast

By contrast, starts in Sunbelt markets with high levels of in-migration are relatively unchanged. Austin’s new office development has increased from 5.1 million square feet in 2019 to 5.8 million this year. Other major Sunbelt locations are recording only slight declines.

Transactions: Manhattan and Washington, D.C., Leads Sales Volume

CommercialEdge has logged $69.3 billion of sales through the first three quarters of 2022.

Year-to-Date Sales (Millions)

The Washington, D.C. market has been one of the most active in 2022, with $4.1 billion in volume, nearly equaling the $4.5 billion in sales recorded in each of the previous two years. The highest-priced asset in the market so far — by both total cost and price per square foot — is 601 Massachusetts Ave. NW, a 478,818-square-foot property that traded for $531 million ($1,109 per foot). The amenity-laden building in the Seventh Street Corridor was delivered in 2015 by Boston Properties, which sold the building to Mori Trust.

Year-to-Date Sale Price Per Square Foot

Asset Class Price Per Square Foot

Quarterly Transactions (Billions)

Quarterly Transactions Price Per Square Foot

Western Markets: San Diego Office Rents Outpace Los Angeles

San Francisco continues to lead western markets in terms of asking rents, posting a rate of $66.75 per square foot in September — more than double the national average —as the result of a 3.3% Y-o-Y increase. The Bay Area followed with an average rent of $53.93 per square-foot, after rents contracted 2.8% compared to the year-ago rate of $55.46 per square-foot, while vacancies rose 0.11% during the same timeframe.

And while Los Angeles office rents have been historically higher than San Diego rates, rankings have been upended by current market conditions, most likely influenced by the San Diego office market’s increased resilience due to its life sciences sector. Thus, San Diego closed September with a $43.91 per square foot rate, while Los Angeles clocked in at $43.06 per square foot.

Further up the coast in the Pacific Northwest, Seattle continued to post higher asking rents than Portland, with rates coming in at $36.79 per square foot and $30.09 per square foot, respectively. And while Seattle office rates came in over year-ago rates, in Portland rates slipped 0.9% below year-ago figures. Rents for Denver office space also trended up, albeit at a modest 0.6% year-over-year, resting at $30.14 per square foot.

West Regional Highlights

In terms of new supply, both Seattle and the Bay Area had the equivalent of 4.5% of their existing stock under construction, with Seattle set to add 18.8% and the Bay Area 5.3% when taking into account planned projects. San Diego came next with under construction office projects accounting for 4.3% of its stock, with its pipeline rising to 9.9% when considering planned developments as well. Other major Western office markets’ under construction projects accounted for less than 4.0% of their stock, with Portland’s pipeline at a mere 0.7%.

From a transactional perspective, the Bay Area was the only Western market to surpass $3 billion in office sales, but Los Angeles followed close behind with $2.89 billion. Denver had the third-largest sales volume on the West Coast at $2.88 billion, with Seattle and Phoenix also in the $2 billion and over range at $2.63 billion and $2.12 billion, respectively.

However, San Francisco claimed the highest year-to-date sales price not only on the West Coast, but nationwide as well at $941 per square foot, followed by Seattle’s $583— the third-highest rate nationwide. Phoenix clocked in at $277 per square foot, surpassing the national rate of $263.

Midwestern Markets: Chicago’s $2.5 Billion Sales Volume One of the Ten Largest in the U.S.

In the Midwest, both Chicago and the Twin Cities saw asking rents trend month-over-month, but year-over-year, both markets contracted. As such, Minneapolis - St. Paul closed September at $25.64 per square foot following a 4.9% year-over-year drop. Chicago rates ticked down at a slower 2.1% rate, going from the year-ago $28.09 per square foot to $27.51 per square foot in September 2022.

In terms of vacancies, the Twin Cities saw vacancies inch down, while Chicago’s office market saw vacancies increase by 3.1%.

Midwest Regional Highlights

From a sales perspective, the Midwest’s two top markets both posted year-to-date sale prices below the national average of $263 per square foot. Specifically, Chicago’s office assets traded at an average of $182 per square foot and the Twin Cities averaged $123 per square foot for office transactions. As a result, Chicago had the 22^nd and the Twin Cities the 25^th highest year-to-date sale price among the nation’s leading office markets.

But while Minneapolis – St. Paul closed $844 million in office sales in the first three quarters of the year, Chicago totaled $2.5 billion — the tenth largest office sales volume in the U.S.

When it came to new supply, both markets were below the national average of 2.1% of existing stock. Specifically, Chicago’s under-construction office projects accounted for 1.0% of its existing stock, while the Twin Cities’ office starts with shovels in the ground accounted for 0.5% of its current stock.

Southern Markets: Washington, D.C. Closes $4.1 Billion in Office Sales in First Three Quarters of the Year

Miami remained the darling of the Southern office sector with asking rents continuing to rise and reaching $48.32 per square foot. It was followed by Austin’s $42.03 per square foot rate, the result of a 4.0% year-over-year contraction, while Washington, D.C. inched up nearly 2.0% year-over-year to rest at $41.43 per square foot. Of the ten Southern office markets ranking among the country’s leading 25, half recorded decreases and half increases in average asking rents, while vacancies were on the rise in seven.

In Texas, Austin was not the only market where rents slipped below year-ago figures, with Houston rates inching 1.6% year-over-year to rest at $29.86 per square foot. Asking rents in the Dallas – Fort Worth area stood at $28.50 per square foot, 0.9% below year-ago figures, with vacancies ticking up 0.6% year-over-year. In Florida, Orlando rates rose to $23.70 per square foot with vacancies also on the upswing at a 1.7% year-over-year rate. Tampa rents trended down to $28.09 per square foot, with vacancies 1.3% higher than year-ago figures.

South Regional Highlights

In terms of sales, Washington, D.C. claimed the second-largest office sales volume in the U.S. at $4.1 billion, while Dallas was fifth with $3.74 billion in office sales and Atlanta followed with $2.69 billion. Tampa and Orlando totaled less than $1 billion in office deals in the first three quarters of 2022, closing $729 million and $538 million, respectively.

However, Miami claimed the highest year-to-date sales price in the South at $393 per square foot, followed by Austin at $384, Charlotte’s $303 per square foot and Washington, D.C. at $302, with all four markets comfortably above the national average of $263 per square foot.

New office developments continued at a quick pace in Austin, Charlotte and Nashville, which had the most robust office development pipelines in the country from the perspective of increases to existing stock. Specifically, Austin’s under construction projects accounted for 8.5% of its existing stock, Charlotte’s for 7.7% and Nashville’s for 5.6%. Even in terms of square footage, Austin and Dallas had some of the largest development pipelines, outpaced only by the Bay Area, Boston and Manhattan. 

Northeastern Markets: Boston Sales Volume Surpasses Combined Sales of New Jersey, Philadelphia and Brooklyn

Manhattan, of course, continued to post the steepest asking rent in the U.S., closing September at $70.37 per square foot and a 0.8% year-over-year contraction. As expected, Brooklyn was the second-priciest office market in the Northeast at $50.24 per square foot. Boston, New Jersey and Philadelphia had the next highest rents, resting at $40.33 per square foot, $32.88 per square foot and $30.58 per square foot, respectively.

Manhattan, as expected, had the largest sales volume in the country by a significant margin, closing $5.46 billion in office sales, with Washington, D.C.’s $4.1 billion the next largest. Boston’s sales volume total was just $2 million shy of $4 billion. As a result, Boston’s sales volume was larger than the combined sales volumes of New Jersey ($2.21 billion), Philadelphia ($1.03 billion) and Brooklyn ($607 million).

And while Philadelphia’s and New Jersey’s year-to-date sale prices of $200 per square foot and $234 per square foot were under the $263 per square foot national average, Manhattan, Boston and Brooklyn were among the five most expensive office markets in the U.S. Specifically, Manhattan’s $858 per square foot was second, while Boston’s $485 and Brooklyn’s $480 were fourth and fifth.

Northeast Regional Highlights

In terms of new supply, Manhattan and Boston had the largest square footage of office space under construction at 18.6 million square feet and 12.44 million square feet, respectively. That accounted for 4.1% of Manhattan’s existing stock and 5.2% of Boston’s. In fact, when taking into account office projects in the planning stages, Boston is set to increase its office footprint by 12.4%. Conversely, New Jersey’s 1.37 million square feet of office space currently under construction is set to expand its footprint by a mere 0.7%. When taking into consideration planned projects as well, New Jersey’s pipeline accounts for 1.8% of its existing stock, for the slowest rate of increase in office space among the top 25 office markets in the U.S.

Office-Using Employment: Financial Activities Sector Hiring Wanes

Office-using sectors of the labor market added 51,000 jobs in September, according to the Bureau of Labor Statistics (BLS).

The financial activities sector has slowed in recent months and turned negative in September, losing 8,000 jobs. Before the pandemic, employment growth between all three office-using sectors moved more or less in sync. Following the pandemic, however, financial activities has fallen behind Information and professional and business services (PBS). In every month since April 2021, the Information and PBS sectors have grown at an annualized rate of more than 5%.

In contrast, the financial activities sector’s peak growth rate during was just 2.4%, recorded in June 2022. In August, seven of the top 25 markets covered by CommercialEdge — Denver, Boston, the Bay Area, San Diego, Phoenix, Los Angeles and Washington, D.C. — lost financial activities jobs year-over-year. That slowdown is bad news for the office industry, as financial sector workers are some of the most likely to come into the office full-time.

Office-Using Employment Growth by Sector

Trends & Industry News: Flex Space Demand Drives Expansion

Driven by hybrid work arrangements, a flight-to-quality among occupiers and a desire to avoid long-term leases, demand for flexible office space is rapidly increasing.

An analysis of surveys from major brokerages indicates that demand for flexible office space will continue to grow in coming years. JLL’s Future of Work Survey of more than 1,000 corporate real estate decision-makers found that 43% of firms plan to increase investment in flex space through 2025.

CBRE’s Occupier Sentiment Survey showed while only 17% of U.S. occupiers report that flex space is a significant portion of their real estate portfolios today, 59% said that it will be significant within the next two years. It’s not only C-suite decision-makers driving demand, however, but workers as well. A joint WeWork and Cushman & Wakefield survey found that people in WeWork offices currently spend 40% of their work time in the flex space but want to increase that to 55% in the future.

Given the flexibility and amenities coworking locations provide, there is real opportunity to align with what corporations are needing in future space decisions. We’re tracking around 120 million square feet of flexible space and expect that number to rise significantly in the future.

Peter Kolaczynski, CommercialEdge Senior Manager

Commercial real estate brokerages are taking notice and increasing their investments in coworking. After investing more than $200 million in Industrious in 2021, CBRE put an additional $100 million into the flex space operator this year.

Cushman & Wakefield entered a strategic partnership with WeWork, investing $150 million and combining the coworking firm’s hospitality technology with the brokerage’s asset and facilities management services. JLL is operating coworking spaces under the brand Flex by JLL and will be developing a ground-up, 15,407-square-foot coworking space in Secaucus, N.J.

Meanwhile, established industry participants are also increasing their footprints. Over the summer, IWG, the parent company of both Regus and Spaces, announced it would be adding at least 500 U.S. locations with a focus on smaller cities and the suburbs. Between its two brands, IWG already has upward of 1,000 coworking locations in markets covered by CommercialEdge. WeWork, the second-largest operator, has more than 250 spaces.

The shift to hybrid work is also leading owners to consider operating their own coworking spaces in an effort to restore occupancy and cash flow. Boston Properties has rolled out FLEX by BXP in a handful of its buildings and Irvine Company offers Flex Workspace+. However, smaller landlords may be wary of the large capital expenses that come with building out high-quality flex space and may look to dedicated operators instead. Management agreements which allow owners and flex space operators to share revenue could become a common solution.

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports.

Methodology

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge.
• 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.
• A and A+/Trophy buildings have been combined for reporting purposes.

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.

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors information, financial activities, and professional and business services. Employment numbers are representative of the metropolitan statistical area and do not necessarily align exactly with CommercialEdge market boundaries.

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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