Key takeaways:
- National industrial in-place rents averaged $7.33 per square foot in June, up 7.4% year-over-year
- The national vacancy rate stood at 4.5%, up 20 basis points month-over-month
- Nationwide, nearly 607 million square feet of industrial space was under construction
- Industrial transactions totaled $21.2 billion through June, at an average sale price of $129 per square foot
- Phoenix recorded 9% rent growth year-on-year in June, the highest increase among markets without immediate port access
- Columbus remained the tightest industrial market with a vacancy rate of just 1.3%
- Charlotte boasted the second-largest pipeline in the South, with 14.9 million square feet of space underway
While industrial properties continue to be one of the most sought-after asset types, challenges in the economy have slowed down investment in the sector. Through the first half of 2023, industrial sales totaled $21.2 billion across the U.S., significantly below the $55 billion recorded during the same period in 2022, according to our latest U.S. industrial market report.
But higher interest rates and normalized demand also slowed industrial construction, with 147.1 million square feet breaking ground in the first half of the year, a 53% decrease compared to the same timeframe last year.
Nonetheless, industrial fundamentals remained strong, with significant rent growth, especially in port markets, where tenants continued to pay hefty premiums for new leases. For instance, in Los Angeles, new leases signed in the past 12 months averaged $19.92 per square foot, $7.20 more than in-place rents.The wide lease spreads might indicate steady future growth despite economic uncertainties.
Rents and Occupancy: Ports Remain Largest Driver of Rent Gains
National in-place rents for industrial space averaged $7.33 per square foot in June, an increase of four cents from May and up 7.4% year-over-year.
Southern California continues to see the largest rent gains in the nation, with in-place rents jumping an astounding 17.4% in Inland Empire over the last 12 months, 13.2% in Los Angeles and 10% in Orange County. East Coast ports are seeing healthy gains as well, with Boston in-place rents growing 10.3%, New Jersey seeing 8.8% growth and Bridgeport 8.5%. Phoenix, which is undergoing a manufacturing boom and receives overflow activity from firms crowded out of Southern California, is the only market not near the water in the top 10 for rent growth.
Average Rent by Metro
The national average vacancy rate in June was 4.5%, a 20-basis point increase from the previous month. New construction has been at all-time highs since the pandemic, and properties delivering while demand has normalized led to a slight increase in vacancy rates across the country. However, industrial vacancy rates are still tight by historical standards.
The average rate for new leases signed in the last 12 months rose to $9.76 per square foot through June, $2.43 more than the average for all leases.
The markets with the largest spreads between in-place rents and new leases were all in California. New leases cost $8.46 more per foot in the Inland Empire, $7.20 more in Los Angeles, $6.56 more in the Bay Area and $5.81 in Orange County. The Midwest generally had the lowest spreads between new and existing leases, but in Charlotte, new leases were eight cents less than the average for all leases.
Supply: New Construction Starts Continued to Cool as Demand Normalizes
Nationally, 606.5 million square feet of industrial space was under construction as of June, representing 3.3% of existing stock. Through the first six months of the year, a total of 202 million square feet of industrial space has been delivered, per our industrial property market report.
Meanwhile, due to higher borrowing costs and normalized demand, new industrial starts have cooled this year, with 147.1 million square feet beginning construction in the first half of the year. During the same period in 2022, developers broke ground on 313.2 million square feet.
National Industrial Supply Pipeline Trend
Charlotte was one of the more active markets for new development, with 14.9 million square feet under construction as of June. Logistics is the main focus of the market, with the majority of projects underway found in logistics parks, whether that be new locations or expansions to existing centers.
For example, Macy’s has committed to the first building of 85 North Logistics Center, a 1.4 million-square-foot building in China Grove. Some companies, such as Sherwin-Williams, Charlotte Pipe and Foundry and Kroger, are building their own logistics facilities in the market.
Transactions: Industrial Sales Volume Down 61.5% in 2023 Compared to Last Year
Nationally, $21.2 billion of industrial transactions have been logged through June, our industrial market report reveals. The first half of 2023 has seen a significant slowdown in sales volume compared to last year, when more than $55 billion in sales were recorded during the same period, the latest U.S. industrial market report reveals.
Nonetheless, while transaction volume has fallen sharply this year, the average sale price of an industrial property has risen slightly. So far in 2023, industrial properties traded at an average of $129 per square foot, up from $124 per square foot last year.
2023 Year-to-Date Sales (Millions)
Despite the deceleration in sales volume across all commercial property types, there is still a significant appetite for high-quality industrial assets. Recently, Prologis paid $3.1 billion to Blackstone for a 14-million-square-foot portfolio across some 70 properties in Southern California, Atlanta, Dallas and Washington, D.C. Based on industrial property outlooks, there is hope that the transaction could help provide valuable sales comps for where the transactions market is at in 2023 and help close some of the bid/ask gap.
Western Markets: Manufacturing Boom Continues to Fuel Phoenix
Southern California continued to lead the nation in industrial rent growth. The Inland Empire saw a significant increase of 17.4%, followed by Los Angeles at 13.2% and Orange County at 10% year-over-year in June. Rent growth in the West also remained robust outside Southern California. For instance, Phoenix's in-place rents rose by 9% compared to the previous year, while Seattle and Portland gained 7.8% and 7.7%, respectively.
Consequently, the West remained the priciest industrial market nationwide. Orange County led with an average of $13.70 per square foot, followed by Los Angeles' $12.72 per square foot and the Bay Area's $12.55 per square foot. In contrast, Central Valley was the only region to record in-place rents below the national figure of $7.33 per square foot, resting at an average of $5.77 per square foot.
The widest lease spreads were also seen in coastal markets: In the Inland Empire, a new lease cost $8.46 more per square foot, $7.20 more per square foot in Los Angeles, $6.56 more in the Bay Area and $5.81 more in Orange County. This meant that in Los Angeles, new leases signed over the past 12 months averaged a dizzying $19.92 per square foot, $19.51 per square foot in Orange County, $19.11 per square foot in the Bay Area and $17.25 per square foot in the Inland Empire.
Phoenix is currently experiencing a manufacturing boom and is receiving an influx of activity from companies that have been pushed out of Southern California. Thanks to this surge, the market boasted the largest supply pipeline, with more than 58.8 million square feet of industrial space under construction, equal to 16.6% of existing inventory.
West Regional Highlights
Looking at transactions, the West led the nation in the first half of the year, with investors trading a total of $6.52 billion across the region's top markets, the latest U.S. industrial market report shows. The Inland Empire claimed the top spot, with $2.44 billion in industrial transactions, closed at an average price of $259 per square foot.
The next largest sales volumes were recorded in the Bay Area and Los Angeles, totaling $1.23 billion and $1.20 billion, respectively. The Bay Area and Los Angeles also saw the highest average sale prices in the region, with properties trading at $355 per square foot and $344 per square foot, respectively.
Midwestern Markets: Columbus Remains Tightest Market with Vacancy Rate at 1.3%
In contrast with Western markets, investors across leading Midwest industrial hubs traded only $2.08 billion year-to-date through June, the lowest volume recorded among the four regions highlighted in our report.
Looking at individual markets, Chicago led the Midwest, with investors closing $764 million through the first half of 2023 at an average sale price of $84 per square foot. Cincinnati recorded the next largest sales volume, with industrial deals totaling $349 million closed at an average of $145 per square foot. The Ohio metro was the only Midwestern market to top the national average sale price of $129 per square foot.
Continuing the trends reported in previous industrial real estate market reports, Columbus remained the Midwest’s tightest industrial market, with only 1.3% of its space available for lease. Indianapolis recorded the next lowest vacancy rate, coming in at 2.9%. For the first time in several quarters, Columbus also recorded the highest rent growth in the region with a 5.1% year-over-year increase in June, to an average of $4.34 per square foot. Cincinnati followed with in-place rents growing by 4.3%, reaching $4.63 per square foot.
Midwest Regional Highlights
Overall, all markets in the Midwest recorded asking rents below the national average of $7.33 per square foot, and year-over-year rent growth also stayed below the 7.4% national average. In terms of asking rents, the Twin Cities and Detroit came closest to the national figure, with in-place rents resting at $6.50 per square foot and $6.66 per square foot, respectively.
The slower growth in rents and lease spreads in the region can be attributed to the more rapidly expanding industrial stock in recent years. Building new supply is easier in these areas than in port markets, providing tenants with more leverage in rent negotiations than in other coastal markets.
On a percentage-of-stock basis, Columbus continued to have the largest supply pipeline in the Midwest, with 11.4 million square feet of industrial space under construction, accounting for 3.9% of existing stock. Indianapolis followed with 3.2% of its existing stock underway across 11.3 million square feet. Cleveland stood on the other end of the spectrum, with 2.1 million square feet underway, equal to merely 0.5% of local inventory.
Southern Markets: Charlotte Pipeline Substantial Despite Sluggish Fundamentals
Among the top industrial markets in the South, Nashville recorded the lowest vacancy rate at 2.6%, followed by Atlanta’s 2.8%. Most leading markets in the region registered industrial vacancy rates below the national rate of 4.5%, except for Memphis (5%), Tampa (5.6%) and Houston (9.2%).
At the same time, markets with higher vacancies also saw more modest rent increases. For instance, Houston saw lease rates increase 3.4% year-over-year in June, while Memphis and Tampa rents gained 2.8% and 3.9%, respectively. The lowest rent growth, however, was recorded in Charlotte at 2.7%. Miami led rent gains in the region at 8.1 %, becoming the only Southern market to outpace the national growth rate of 7.4%. Atlanta was up 7.1% and Dallas lease rates appreciated by 6.5%.
Miami also remained the most expensive market in the South, with in-place rents coming in at $10.26 per square foot, making it the only leading market outside the West to post double-digit asking rents in June. The market also logged the widest lease spread, with new leases signed over the past 12 months coming in at $15.20 per square foot. Conversely, in Charlotte, new leases signed cost eight cents less than in-place rents, resting at $6.43 per square foot.
South Regional Highlights
Nonetheless, in terms of development, Charlotte was one of the more active markets in the South. As of June, the metro’s under-construction pipeline was 14.9 million square feet, accounting for 4.9% of existing inventory. Since the beginning of 2022, developers delivered 16 million square feet of industrial space, with most of it being logistics.
The Dallas - Fort Worth Metroplex, however, continued to have the largest development pipeline in the South. As of June, the metro had 52.7 million square feet of industrial space under construction, making up 5.9% of existing stock.
Through the first six months of the year, Dallas - Fort Worth and Houston recorded the largest sales volumes, totaling $957 million and $907 million, respectively. However, Atlanta and Tampa led in terms of sales price, with assets trading at an average of $114 per square foot.