Key Takeaways:
- National industrial in-place rents averaged $7.12 per square foot in February, up 6.9% year-over-year
- The national vacancy rate stood at 3.9%, down 10 basis points month-over-month
- Nationwide, 667.5 million square feet of industrial space was under construction
- Industrial transactions totaled $3.9 billion at an average sale price of $150 per square foot
- The Inland Empire recorded the largest sales volume nationwide, totaling $855 million
- Midwest logistics hubs continued to post some of the most affordable rents across the U.S.
- Miami and Atlanta recorded the lowest vacancy rate in the South, both at 2.7%
- Boston logged the most robust rent growth in the North, up 10.7% year-over-year
Despite elevated levels of new supply coming online over the past few years, the continued demand for industrial space is keeping market fundamentals healthy across the U.S. The national average rent for in-place leases stood at $7.12 per square foot in February, growing 6.9% over year-ago figures, as the U.S. industrial market report reveals.
Rents and Occupancy: New Lease Premium Highest in Port Markets
National in-place rents for industrial space averaged $7.12 per square foot in February, up 6.9% year-over-year and two cents higher than January, according to the U.S. industrial market report. Growth of in-place rents was highest in port markets adjacent to a shipping port, led by the Inland Empire (15.6% year-over-year), Los Angeles (11.6%), Boston (10.7%), Orange County (9.2%), Bridgeport (9.0%) and New Jersey (8.7%).
The national vacancy rate was 3.9%, a decrease of 10 basis points over the previous month. More than a billion square feet of new stock has been delivered over the last ten quarters, yet vacancy rates continued to stay historically low. Port markets and inland logistics hubs have the lowest levels of available stock to lease. The lowest industrial vacancy rates in the country were recorded in Columbus (1.1%), the Inland Empire (1.7%), Phoenix (2.3%) and Indianapolis (2.5%).
New leases signed in the last 12 months averaged $9.09 per square foot, $1.97 more than the average for all leases. The largest spreads between the average rate for all leases and the rate of a lease signed in the last 12 months were in port markets, both on the East and West coasts.
In Los Angeles, new tenants paid $7.16 more per square foot than the market average, $6.69 more in the Inland Empire and $5.39 more in Orange County. On the other side of the country, new leases cost $4.40 more per foot in New Jersey, $3.33 in Miami and $3.16 in Bridgeport.
Supply: More Than 73 million Industrial Space Delivers in the First Two Months of 2023
Nationally, 667.5 million square feet of new industrial supply were under construction as of February, accounting for 3.7% of total inventory. So far this year, developers delivered 73.4 million square feet of industrial space across the U.S.
As most markets have so far been able to absorb the record levels of new supply, developers are expected to continue to expand the national industrial stock.
Western Markets: The Inland Empire Records Largest Sales Volume in the U.S.
The Inland Empire and Los Angeles, along with Boston’s 10.7% rent increase, were the only markets to record double-digit rent growth among the top 30 industrial markets. Outside Southern California, the Bay Area and Seattle recorded the next largest gains in the West, with in-place rents rising 7.2% and 7.0%, respectively, over year-ago figures.
Western markets remained the most expensive in the country: Orange County led with an average rent of $13.20 per square foot, followed by Los Angeles’ $12.39 and the Bay Area’s $12.24 per square foot. Overall, Central Valley ($5.74) was the only region in the West to record in-place rents below the $7.12 national figure.
Thanks to record levels of containers being handled at the ports of Los Angeles and Long Beach, Southern California markets also continued to record hefty premiums for new leases. New leases signed over the past 12 months in Los Angeles, Orange County and the Inland Empire averaged $19.55 per square foot, $18.59 per square foot and $15.01 per square foot, respectively.
Major industrial markets in the West also continued to post some of the lowest industrial vacancy rates in the U.S., with the Inland Empire at just 1.7% — the second-lowest vacancy rate among the top 30 U.S. industrial markets. Phoenix and Los Angeles had vacancy rates of 2.3% and 2.6%, respectively.
Consistent with trends observed in previous industrial real estate market reports, Phoenix has maintained its position as a prominent industrial market, thanks to robust growth in the logistics and manufacturing sectors. As a result, the metro remained the country’s hottest market for industrial development, with 54.1 million square feet under construction as of February, representing 15.6% of the local stock. Manufacturing alone accounted for 12.5 million square feet of total space underway, though much of that will be owner-occupied.
On a percentage-of-stock basis, Denver had the second-largest pipeline in the region, with more than 11.6 million square feet underway, representing 4.6% of its existing stock. Considering planned projects as well, the metro is looking to expand its inventory by 7.7%. Despite limited available developable land and zoning restrictions, the Inland Empire had around 27.7 million square feet under construction, accounting for 4.5% of stock.
With low vacancies and substantial rent growth, the Inland Empire also remained an attractive market for investors. Despite limited available capital for many deals, transactions in the market are still getting done, where $855 million in transactions took place in the first two months of the year at an average sale price of $240. The Inland Empire accounts for more than one-fifth of all sales volume nationwide, according to the industrial property market report.
Average sale prices exceeded the $200 per-square-foot threshold in most Western markets, except for Denver and the Bay Area, where industrial assets traded at $88 per square foot and $190 per square foot, respectively.
Midwestern Markets: Despite Low Vacancies, Columbus and Indianapolis Remain Among the Nation’s Most Affordable Markets
Besides port markets, inland logistics hubs had some of the lowest levels of available industrial space to lease. In the Midwest, Columbus recorded the lowest industrial office vacancy rate nationwide, with a rate of just 1.1%. Indianapolis had the second-lowest vacancy rate in the region and the fourth lowest in the country at 2.5%, outpacing Los Angeles and its 2.6% rate.
But while Southern California markets led the country in rent growth by wide margins, industrial markets in the Midwest — even tight logistics hubs — continued to post some of the most affordable rents among the country’s leading markets. For example, Columbus recorded the lowest lease rate at just $4.14 per square foot, Indianapolis had the second lowest at $4.34 per square foot, followed by St. Louis at $4.36.
At the same time, the highest rent growth in the Midwest was registered in Detroit, where rents were up 4.2% year-over-year as of February, making Detroit the priciest industrial market for industrial leases in the region at $6.47 per square foot. The metro also recorded the widest lease spread, with new leases getting signed at $7.82 — $1.35 more than in-place rents.
The more modest growth rate in the region is likely due to a more rapidly expanding industrial inventory in recent years, thanks to more available developable land for new projects. On a percentage-of-stock basis, Columbus had the largest development pipeline among Midwestern markets, with 4.5% of its total stock underway, followed by Indianapolis with 3.5% of inventory under construction. In terms of square footage, Chicago led with 27.3 million square feet of space under development, equal to 2.7% of local inventory.
Through the first two months of the year, investors closed around $316 million in industrial deals across the Midwest’s top markets. Indianapolis recorded the largest sales volume, a total of $151 million, with properties trading at $153 per square foot. The Twin Cities came in second with $111 million in closed industrial deals, at $85 per square foot.
Southern Markets: Dallas Remains an Industrial Boomtown for Developers
Among leading Southern markets, Atlanta and Miami posted the lowest vacancy rates in February, both markets coming in at 2.7%. Nashville followed, with a 2.9% vacancy rate, well below the 3.9% national average. In contrast, Houston had the highest vacancy rate at 7.6%, both in the South and nationwide.
In markets with higher vacancies, rent growth also remained slower compared to other markets in the South. For instance, Houston and Memphis saw rent rates increase by only 2.7% and 3.4% year-over-year in February, representing some of the most moderate gains in the region and across the top 30 markets.
Rent growth was more robust in Miami and Atlanta, with both markets recording a 7.3%-expansion over year-ago figures. Dallas – Fort Worth and Baltimore followed with rate increases of 5.9% and 5.7%, respectively.
Southern markets with strong fundamentals also saw wide lease spreads, with Miami in the lead: While in-place rents averaged $9.95 per square foot, leases signed over the past 12 months averaged $13.28. Tenants in Nashville also signed at premiums, with new leases costing $2.02 more than in-place rents. Overall, all markets in the South saw higher averages for new leases than in-place rents.
Construction activity was the most tempered in Memphis, Atlanta and Baltimore on a percentage-of-stock basis: Underway industrial projects in Memphis totaled 1.6% of existing stock, while Atlanta’s and Baltimore’s development pipelines were set to increase the local stock by 1.8% and 1.9%, respectively.
On the other end of the spectrum stood Dallas – Fort Worth with more than 58.9 million square feet of industrial space underway as of February, equal to 6.7% of existing stock. In terms of square footage, the Metroplex had the largest pipeline nationwide, exceeding Phoenix’s 54-million-square-foot pipeline. Considering projects in the planning phases, Dallas – Fort Worth’s industrial stock is set to increase by 12.2%, the same rate as Charlotte’s under-construction and planned industrial pipeline.
Among Southern markets, Charlotte and Houston had the most robust sales volumes, closing $186 million and $120 million in sales, respectively, year-to-date through February. Houston led in terms of pricing, with properties trading at $155 per square foot, followed by Atlanta’s $150 average per square foot and Dallas – Fort Worth’s average of $109 per square foot.
Northeastern Markets: New Jersey Continues to Attract Most Industrial Capital in the North
On par with other port markets, New Jersey’s vacancy rate remained tight at 2.8%, coming in after Los Angeles’ 2.6% and Miami’s 2.7%. Thanks to the market’s high occupancy rate and continued demand, industrial rents in New Jersey experienced significant growth, rising 8.7% year-over-year in February. The market also had one of the widest leases spreads nationwide, with in-place rents averaging $9.39 per square foot, while new leases signed over the past 12 months averaged $13.79 per square foot.
Boston recorded the highest rent growth in the Northeast and the third highest nationwide, surging 10.7% over the past 12 months. At the same time, new lease premiums reached $2.31 per square foot in Boston. Connecticut’s growing industrial market, Bridgeport, also recorded notable rent growth, up 9% year-over-year in February