As markets across the U.S. struggle to rebuild in the wake of the Covid pandemic, old issues combine with new challenges to shake up almost every industry. The industrial sector is no different, and the past months have seen record highs in terms of lease spread, as well as record lows when it comes to vacancy rates and sales across the country.
In their latest report, CommercialEdge looked at the figures to determine the state of the industrial real estate market as we approach the final quarter of 2022. Here are the key findings:
Supply Chain Woes Continue to Rock the Industrial Sector
The global supply chain issues from the previous months have contributed significantly to inflation reaching 40-year highs. Within the industrial sector, this has resulted in a massive slowdown in construction, with new deliveries grinding almost to a halt. Paired with higher-than-expected post-pandemic demand for industrial space across the country, this year has seen industrial rents rocket, sales prices soar compared to pre-pandemic levels, and vacancy rates at an all-time low.
The supply chain woes that delay any potential solution to this problem are multi-faceted. First, ongoing truck driver shortages began long before the pandemic and have only worsened. Plus, new safety measures introduced to protect said drivers have seen them reduce the number of work hours. Meanwhile, a slowdown in China’s economy due to its strict “Zero-Covid” rules has seen entire chunks of trade shutdown. Finally, huge backlogs at ports and issues with offloading cargo mean that imports that do arrive aren’t always being delivered efficiently.
With so many contributing factors, there’s no simple solution to the issue. Additional industrial space would alleviate it, but the demand for much-needed facilities is also a part of the problem, resulting in a vicious cycle. There is some good news, though. Amazon, which has dominated warehouse construction supply markets in recent years, has pulled back from its aggressive development stance. As a result, this change of direction is predicted to relieve some of the pressure.
Rent Increases Lead to Record Highs in Terms of Lease Spread
Unrelenting demand for industrial space has seen rents increase nationwide. On average, in-place rents were at $6.60 per square foot this July, marking a 5.3% year-over-year increase. Meanwhile, the average rent for new leases reached $8.05 per square foot, bringing the lease spread up to a record-breaking $1.45 per square foot.
Port markets, particularly those in Southern California, stood out in terms of rent growth. In LA, in-place rents have seen a 7% boost compared to a year ago, reaching $10.74 per square foot on average, while new lease premiums were $4.89 per square foot, the highest in the country. Nearby, Orange County led industrial rents across the U.S. at $12.11 per square foot, while the Inland Empire market saw the most significant year-over-year rent surges, rising 8.7% to $6.91 this July.
Vacancy Rates Continue to Plummet
Despite industrial rents reaching all-time highs in many parts of the country, there’s been no slowdown in demand. And, hand in hand with demand, vacancy rates have plummeted over the last months. The national vacancy rate stood at 4.4% in July, 140 basis points lower than the previous year and down 20 basis points month-over-month.
The southern Californian market of the Inland Empire posted a vacancy rate of just 0.8%, the lowest in the country. Columbus followed close behind at 0.9%, while LA posted 1.9%. On the other side of the country and the other end of the spectrum, Tampa boasted the highest industrial vacancy rate, at 8.7%.
Despite Hurdles, Construction Pipeline Approaches 700 Million Square Feet Nationwide
Since the beginning of the year, the industrial sector has seen around 200 million square feet of new space go live. Meanwhile, the construction pipeline grew by a further 28.2 million in July, taking the total up to just almost 700 million square feet of work underway. Moreover, almost the same amount of projects are in the planning phase.
National Industrial Sales Volume Rises to Almost $50 Billion
July saw sales figures of $10.3 billion, bringing the total for the year to $49.9 billion. With sales hottest in and around port markets, both the Los Angeles and Houston markets breached the $3 billion mark. Some of the most significant sales were recorded in the LA submarkets of San Gabriel Valley and South Los Angeles. They brought in $694.9 million and $412 million worth of industrial sales, respectively.
Both submarkets are located near the ports of LA and Long Beach, thus contributing to LA’s total sales of $3.3 billion, the largest in the country. LA also led in terms of the sale price per square foot. At an average of $291 for 2022, this figure was $6 lower than the previous year but 50% higher than 2019’s pre-pandemic prices.
For an overview of the office and shared spaces market in some of the areas mentioned in this study, visit the links below: