#128 – Inside Our Industry – Q3 Industrial: Construction Reaches Record Territory, Demand Starts to Wane

Posted on | Inside Our Industry

There are many BIG players in the industrial real estate market. For us at Agracel, our sweet spot has always been (and will likely remain) in the $5 – 20 million range. We keep an eye on what is happening industry-wide, even as our tertiary markets often lag behind the larger urban markets. The following report from ConnectCRE.com provides a third-quarter report.

Q3 Industrial: Construction Reaches Record Territory, Demand Starts to Wane

U.S. industrial market third-quarter reports agreed on two things. First, construction continues climbing and is reaching record numbers. And second, demand for industrial product is starting to decelerate.

Developers remain bullish on the industrial sector, which is leading to a lot of construction activity. Cushman & Wakefield’s National MarketBeat indicated that even with high construction activity, vacancy remains tight, causing rents to increase. “Looking at the three-year trend, the average asking rate as surged by 35.1%,” Cushman & Wakefield analysts said.

JLL’s Industrial Outlook echoed this sentiment, claiming that “despite a loss of momentum in the macroeconomic environment, industrial market fundamentals remain sound . . .” Additionally, there are “only limited signs of demand cooling off so far,” Savills noted in its U.S. Industrial Market Update.

On the other side of the coin, “demand for space in the United States Industrial market is slowly moving down the path to normalization after two years of frenzied imbalance,” according to the Newmark National Industrial Market report. The report added that this will likely bring the market toward equilibrium. The Colliers U.S. National Industrial report also indicated signs of demand deceleration, noting that “while the development pipeline remains incredibly full . . . demand is starting to wane for industrial product.”

JLL analysts also pointed out that construction pre-leasing rates aren’t as strong as they were in 2021. Meanwhile, Newmark researchers indicated that many developers are pushing the pause button on speculative projects, at least until leases are signed. Others are selling their development sites, while larger occupiers “have either canceled or delayed plans to move forward on new development projects,” the Newmark report commented.

All agreed that more supply and waning demand will likely drive vacancy rates upward. Cushman & Wakefield indicated that rental growth rates should moderate, compared to previous double-digit growth rates. Meanwhile, the potential increase in supply will mean “some relief for tenants facing a historically tight market,” the Newmark report said.

But Colliers noted that rising inflation and a potential economic downturn is boosting consumer uncertainty. This, in turn, could mean “a decrease in retail sales and lower industrial demand,” Colliers researchers said. As companies continue assessing supply chain strategies and “industrial activity is expected to ease as economic conditions worsen,” Colliers added.

With record construction levels and waning demand, Is there any danger of oversupply? Not just yet. But the Cushman & Wakefield analysts indicated that “with the development pipeline at an all-time high, observing individual markets for signs of oversupply will be extremely important,” especially given economic uncertainty. Savills researchers echoed the sentiment, pointing out a potential oversupply risk in Sun Belt metros, including Atlanta, Dallas-Fort Worth and Phoenix.