While the previous two years have seen most industries slumping in terms of sales, the industrial market has thrived. Instead of slowing down, the sector has recorded heavy investment in industrial assets around the U.S. And as vacancy rates plummet and demand outstrips supply, rents are on the increase.
In a recent report covering June data, CommercialEdge looked at the state of the country’s industrial market. Here are their findings:
Geographical Limitations Lead to New Industrial Concepts
Despite current economic uncertainty, the demand for industrial space has continued to rise. The need for centrally located distribution centers to meet the requirements of fast e-commerce deliveries has seen the industrial landscape begin to change considerably. In areas with limited land to build on, such as port cities and urban hubs, developers have had to think outside the box to deliver the necessary industrial space.
Multi-story industrial buildings have long been a staple in Asian markets. However, they are still a relatively new concept in the U.S. Despite the extra cost involved in creating these facilities—an additional 40% on average for the same square footage of a single-story unit—they look set to become a lucrative niche in the right markets. Indeed, Amazon has recently invested in numerous multi-story industrial buildings around the country.
Other options look into converting unused office and retail space into industrial units, though such conversions remain rare for the time being. This could soon change as land availability decreases. However, for the time being, outdoor storage facilities are bridging the gap.
Average National Rent Rises by Almost 5% Y-o-Y
Reflecting the demand for industrial space, the national average in-place rent rate in June grew by 4.9% compared to a year ago. This represents an increase of 4 cents month-over-month, taking the total to $6.57 per square foot at the end of Q2. Meanwhile, the rent for new leases averaged $7.65 per square foot over the last year.
Coastal areas, particularly Southern California, have seen the most significant spikes in rent, an ongoing trend as geographical limits and low vacancies collide with huge demand. LA remains among the most in-demand regions in the country, with new leases costing $4.37 per square foot more than the $10.63 average.
Sales Price Up by More Than 30% Y-o-Y
It’s not just rental prices that are on the increase as vacancy rates plummet. Q2 marked the seventh consecutive quarter in which industrial sales prices grew. The average sale price rose to $138 per square foot, a 31.3% year-over-year increase and a 12.4% boost over Q1 figures. During this time, the average sale price for industrial space went up by a staggering 67% nationwide.
By the end of Q2, the national sales volume of industrial space was at $39.6 billion, after $8.4 billion worth of sales in June. Once again, sales in Southern California markets boasted the highest prices as investors battled for increasingly limited assets.
Industrial Vacancy Rates Continue to Drop Nationwide
At the end of Q2, the national vacancy rate had dropped 10 basis points month-over-month and a whopping 120 basis points year-over-year. This took the national average down to 4.6% in June, although, once more, there are significant regional disparities.
California’s Inland Empire continues to boast the lowest industrial vacancy rates in the country, with just 0.6%. This has resulted in the largest rent increase, with a jump of 7.4% year-over-year taking the price per square foot to $6.86. Detroit, however, recorded a higher vacancy rate of 7.2%. But with increased interest in the area as a potential industrial hub, things could soon change.
New Industrial Space Struggles to Meet Demand
To meet the huge demand, millions of square feet of industrial space are currently under construction across the country. In June alone, 11 million square feet of new space broke ground, which saw the national pipeline grow to 667.5 million square feet. In addition, a further 684.6 million square feet is in the planning stage, equivalent to 7.8% of the existing inventory nationwide.
So far, just under 160 million square feet of new industrial space have seen completion in the first half of 2022. Many of the new builds are fulfillment and logistics centers and distribution hubs designed to service the E-commerce sector.
Dallas boasts the largest amount of new industrial space so far in 2022, with 15.9 million square feet seeing completion by the end of June. On top of that, with 57 million square feet in the works, the equivalent to 6.8% of its current stock, it has the largest construction pipeline in the country.
Interested in the office or shared spaces market in the cities mentioned in this report? Check out the links below: