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Category: Industrial Tags: End of Year

2023 End Of Year Industrial Market Report

Market Overview

The year 2023 was an especially tough one for real estate. The depreciation of asset values, which commenced in the later part of 2022 in many markets, proliferated across a broader spectrum. Transaction volume continued to fall through the year, with dealmaking paralyzed by the standoff between buyers and sellers on pricing. The fluctuations observed have significantly altered the dynamics within the industrial sector – investors are reevaluating their portfolios and strategies, aiming to mitigate risks while capitalizing on the opportunities from market dislocation.


For 2024, there is optimism among investors for a more favorable year, anticipating stabilization in pricing that would restore the market to more typical levels of activity. The details and timing remain uncertain; it could manifest through heightened distress compelling sellers to enter the market, or a gradual decline in interest rates will restore confidence among potential buyers.


Key Highlights

  • The industrial sector recorded $82 billion in sales volume, marking a 46% YOY decline. Cap rates for most property types have experienced instability, possibly delaying capital entry.
  • Unprecedented growth in 2021 and 2022 leads to over delivery with 450 million square feet delivered in the first three quarters of 2023. New development starts, in 2023, slowed with 602.1 million square feet under construction, primarily speculative.
  • Rising interest rates, vacancy concerns, and normalizing demand post challenges. The vacancy rate surpassed 5% for the first time in three years, reaching 5.2% in Q4 2023.
  • Record rent growth experienced over the last few years, recording 6.2% in 2023. Rent growth is expected to moderate in 2024 due to extreme overvaluation and substantial new construction.


2023 Performance

The industrial sector was the second most traded asset class behind multifamily in 2023, recording $82 billion in sales volume, a 46% YOY decline. This was the lowest sales volume record in about six years. Performance varied across sub-sectors; flex properties experienced the sharpest decline at 76%, warehouse at 61%, portfolio and entity at 36%, and individual asset sales saw a drop of 69%. The total number of properties sold was 6,564, a 36% decrease YOY. The average price per square foot was $130, about 4% lower than in 2022.


No entity-level deals occurred in November, representing a shift from 16% of total industrial investment in 2022 to 3% in 2023. The absence of such deals impacted the overall performance of industrial. It is also unclear whether the 69% decline in individual asset sales is simply a number that will reverse in the coming months as smaller deals are found or a sign of a new sense of hesitancy within the overall market.


Financing Considerations

Despite the pullback in activity, industrial assets remain attractive to investors and lenders. Macro forces were a contributing factor, making it more difficult for investors to underwrite deals, select financing is available for quality assets and investors with existing relationships with lenders. Unstable cap rates for most property types may also delay capital entry.


Cap Rate Trends

Industrial experienced significant upticks in cap rates in 2023, reaching 6.0% by year-end, a 63 basis point change YOY. Between early 2022 and late 2023, average cap rates increased by roughly 150 basis points. Class A properties recorded an average cap rate of 5.00% amid financing rates of 6.5% or more. While the cap rate is dependent on market and asset class, the southwest and southeast experienced the most substantial cap rate movement, the Midwest remained flat, and Mid-Atlantic reported a slight decline.


The signs of volatility within the transaction market have largely been attributed to the misalignment between buyers and sellers and higher interest rates that have made refinancing more difficult. In 2024, buyer and seller expectations will be more aligned, but the additional cap rate increases in 2024 are expected, though the market settling into an upward pricing trend is not guaranteed.


Rent Growth

Industrial has transitioned from being a traditional warehouse asset into one that aids in the technological integration of the global supply chain. This transition has supported the structural increase in rent growth over the past few years. The asset class remains the strongest for rent growth, recording 6.2% in 2023. The northeast experienced the strongest YOY rent growth at 16.1%, while other regions posted annual rent growth rates ranging from 5.5% to 6.6%. Net lease asking rents per square foot doubled in markets like Orange County, Los Angeles, San Francisco, and the Inland Empire. Furthermore, many U.S. industrial properties, well-leased in 2023 saw lease renewals, often at rents 40% higher than five years earlier.


However, recent momentum indicates that rent growth will moderate in 2024 due to extreme overvaluation and substantial new construction. It’s expected that through mid-2024, YOY rent growth will bottom out at 3%, marking the first time since 2014 that rent growth will fall below 5% nationally.


Accelerated Construction

Unprecedented growth in 2021 and 2022 led to what some experts call an over delivery of units. In 2023, an all-time high of 450 million square feet was delivered in the first three quarters. In 2024, buildings expected to deliver will hit historical highs, with Dallas-Fort Worth, Phoenix, and Atlanta leading deliveries. If all unleased space is completed without signed leases, the U.S. industrial vacancy rate will rise to 6.9%, higher than pre-pandemic averages. However, healthy demand exists, especially as manufacturing on-shores and retailers prioritize last-mile logistics. The $20 billion investment in Intel in Ohio and Amazon’s 4.1 million square foot center in Los Angeles are examples of steady absorption.


New development starts slowed in 2023. The construction underway amounts to 602.1 million square feet, mainly speculative and yet to secure tenants. More than 80% of unleased space under construction began before August 2023. SOFR’s peak at 5.3% in 2023 led to a significant drop in industrial construction starting in the year’s second half.


  • Over the last 12 months, the total stock of U.S. industrial space has grown by 2.8%, almost triple the pre-pandemic 20-year average for annual supply growth.
  • Across the entire U.S., about 1.9 million SF of industrial space is listed as available for lease among existing properties, and 400 million SF of unleased space is currently under construction.


Market Headwinds

Challenges in the industrial sector include headwinds like rising interest rates, vacancy concerns, and normalizing demand. In the fourth quarter of 2023, industrial vacancy rates surpassed 5% for the first time in three years, reaching 5.2%. Although this rate is considered healthy compared to other sectors, it marks a significant increase. Despite this, the industrial outlook remains positive, driven by the growth in e-commerce and reshoring. The slowdown in speculative development is also expected to alleviate some vacancy concerns. The expectation is for continued vacancy rate increases as speculative projects are completed in the first half of 2024. The
pressure from new development completions will subside in late 2024, paving the way for vacancy stabilization.


Demand in the fourth quarter of 2023 was unusually low, hitting a 13-year low for industrial leasing activity. Higher interest rates have weighed on the economy, leading to a decline in tenant demand. This has particularly affected the 350 million square feet of industrial projects completed in 2023, which remain unused. Occupied industrial square footage experienced a consecutive two-quarter decline among properties older than three months. Excluding tenant moves into new properties, the nationwide net absorption was negative at 25 million square feet.


2024 Trends

  • Nearshoring and onshoring, along with increased capital investments, will disrupt traditional production and distribution patterns.
  • In over two decades, the first major railroad merger directly links trade flows between the U.S., Canada, and Mexico, reorienting trade and supply chains and supporting robust rent growth in non-traditional markets as the industrial sector evolves.
  • The economy appears to be slowing, with uncertain key indicators for 2024. Companies are cautiously optimistic, adopting a wait-and-see approach before committing significant funds to expansion.
  • The ongoing need for industrial facilities driven by e-commerce and technology is pushing for distribution efficiency and scale. Signs suggest retailers may resume building inventories in 2024, supported by leaner inventory levels reported in 2023 and positive retail sales growth. However, these trends may not immediately translate into strong demand for industrial space.


Top Markets

  • Despite the overall slowdown, Dallas and Phoenix lead in new industrial development, accounting for over 17% of national starts, with Phoenix taking the top spot.
  • Southern California is the only region experiencing double-digit rent growth, particularly in the Inland Empire, Los Angeles, and Ocean County. Denver has experienced the slowest growth and the largest drop in average sale prices, declining 24% in 2023.
  • New Jersey remains one of the strongest markets in the Northeast, with 9.1% YOY growth in in-place rents and $2.53 billion in industrial sales.


To read the 2022 Industrial End-Of-Year Market Report, click here.

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