Industrial real estate market conditions remain tight, with space in short supply, notes CBRE

The ongoing theme of demand exceeding supply, within the industrial real estate market, remains fully intact, according to data issued this week by Los Angeles-based industrial real estate developer CBRE.

CBRE explained that following a record year, in the U.S. industrial real estate market in 2021, market conditions carried over into the first quarter, with strong demand for space remaining the common theme.

CBRE’s first quarter findings included:

-an overall Q1 vacancy rate of 3.1%, showing how tight market conditions lowered absorption compared to Q1 2022;
-net absorption came in at 93.8 million square-feet (MSF), marking a 10.4% increase, while remaining above the 10-year average;
-construction completions came in at 86.2 MSF (with 62% pre-leased), rising 27.5% annually but down 27.8% compared to the fourth quarter 2021;
-under-construction activity came in at 545.4 MSF (with 32.5% already pre-leased), and Dallas/Ft. Worth, Atlanta, and the PA I-78/81 Corridor and the Inland Empire comprising one-third of the total; and
-the average asking rent increased 3.7% sequentially and rose 11.8% annually, to $8.94 per square-foot, a new record-high

“Demand from occupiers needing safety stock to counter supply chain disruptions should result in further rental rate appreciation and a record-low vacancy rate despite a large amount of new development this year,” said CBRE.

CBRE Director of Research, Industrial & Logistics Occupier, Matthew Walaszek described first quarter industrial real estate activity as good but not great, with trends continuing towards positive tailwinds driving the need for more space and demand again outstripping supply while coming off of a record-breaking year in 2021.

“It is impossible to match that, it was just a goods quarter,” he said. “It is evident that the market is still on good footing. From the investor side, it could be viewed as great, even though interest rates are going up, and from the occupier side, there are challenges, of course, with regards to pricing. Momentum [from 2021] carried over, and companies continued to lease space in response to robust consumer demand. It really almost fascinating, because of what is going on with inflation, and we are looking at that closely to see how that affects demand for industrial space, in particular.”

Even with inflation at a 40-year high, he said that consumer spending remains strong, even though prices are skyrocketing for so many different things, which, in turn, is driving the need for more space, according to Walaszek, with the caveat that it is a risk going forward but not in the first quarter.

Demand for industrial real estate space remains healthy for different types of occupiers, observed Walaszek, including 3PLs, general wholesalers, food and beverage, manufacturers, and big box retailers, collectively keeping the first quarter vacancy rate at 3.1%, well below the historical average of 5.9%.

CBRE observed that despite a large amount of new supply in the industrial real estate pipeline, strong demand for first- and second-generation space is expected to keep availability historically low this year.

To that end, Walaszek explained that it is expected that tight market conditions will continue, given how much demand there is.

“We do expect the vacancy rate to hover around current levels,” he said. “I don’t know if it is going to dramatically decline further, it might tick down still. We are almost reaching equilibrium. With regard to rents, they will continue to go up, because, in a lot of markets, there is virtually no space available. Rents only have one place to go, and that is up. We will continue to see double-digit rent growth, with regard to average asking net and then taking rents are even going up higher than that. That paints a picture of that being a bit challenging for occupiers, but it is still a very hot market.”

In CBRE’s list of net absorption for major markets, Chicago was at the top, at 10.6 MSF, with Phoenix next, at 9.0 MSF. Rounding out the top five were Houston, Dallas/Ft. Worth, and Charleston, at 7.4 MSF, 6.6 MSF, and 5.4 MSF, respectively. For markets with the most space under construction, the top five markets were: Dallas/Ft. Worth, at 57.3 MSF; Inland Empire, at 34.4 MSF; Pennsylvania/I-78/81 Corridor, at 33.5 MSF; Atlanta, at 30.5 MSF; and Phoenix, at 26.6 MSF.