The industrial real estate sector could “cool” somewhat, but still expand and remain one of CRE’s more attractive asset classes, according to CommercialEdge’s recent national industrial report.
“Industrial went through a massive shift in recent years,” the report said. “Demand skyrocketed, vacancies plummeted and investors drove up average sale prices by more than 50 percent in three years. But 2023 may be when things finally normalize.”
The CommercialEdge report also noted that rising interest rates and a potential recession could slow industrial leasing activity as businesses pause expansion plans and deal with pricier borrowing. Additionally, as the supply chain returns to normal, there will be less need for increased inventories than there were 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 industrial markets will lead to increased demand for industrial space along the East Coast in markets like New Jersey, Houston and Savannah-Hilton Head,” the report said.
CommercialEdge also noted that interest increases would “continue to put downward pressure on transaction volume.” The organization reported $88.3 billion in industrial sales in 2022 — a significant drop from the $125.7 billion logged the year before. Year-over-year sales volume was up during the first half of 2022, but the Federal Reserve’s rate increases led to sales volume dropping.
“We expect that sales volume will remain muted in 2023 but could quickly rebound once rate hikes stop and the market adjusts to the new environment,” the report said.
As for e-commerce as a whole, CommercialEdge forecasted it will continue to create industrial demand in 2023, but it likely won’t reach as high of levels as it did in previous years. Online purchases are expected to continue to grow their share of retail sales, and big-box retailers will continue to embrace digital and omnichannel sales. Amazon likely won’t reverse its 2022 pullback this year, according to CommercialEdge. It’s also expected that there will be less demand for multimillion-square-foot distribution centers in 2023 than during the first two years of the pandemic.
“However, we expect that demand for last-mile distribution facilities will grow, especially for well-located facilities in high-growth markets,” the report said.
There was a record amount of new industry supply in 2022, and CommercialEdge reported it expects this year to “set another high-water mark.” CommercialEdge covers 118 markets and in those markets, more than 450 million square feet were delivered last year and 713 million square feet are under construction.
“Despite historic levels of new supply, it was not enough to keep up with demand,” the report said “The average vacancy rate for the top 30 markets fell steadily throughout the year, currently sitting at 3.9 percent. We expect that due to a cooling economy and healing supply chains, absorption will be positive this year, but lower than in previous years.”