#165 – Inside Our Industry – Q2 2023 Industrial: “Reverting to the Norm”

Back to “normal” for the Industrial Market? Without a doubt the past several years have been record-breakers for industrial development. Hang on…

Q2 2023 Industrial: “Reverting to the Norm”
August 10, 2023  |  Amy Wolff Sorter  |  connectcre.com

The industrial sector has been red hot for several years, as indicated by record-breaking low vacancies and high net absorptions. Reports and statistics analyzing the sector during the second quarter were unanimous in saying that this trend is ending. Specifically, the headline topping Cushman & Wakefield’s MarketBeat U.S. National Industrial Q2 2023 summed the quarterly numbers up with the headline “Industrial market cooling but fundamentals remain healthy.” Furthermore, “following two years of record-setting demand and cumulative rent growth . . . the industrial sector appears to be reverting to the norm,” the report said.

JLL’s United States Industrial Outlook Q2 2023 worded the situation differently, noting that “industrial markets across the country posted sluggish figures compared to one year ago.” The report cited the reasons for this as “record amounts of new product delivering to the market and lagging prelease in recent quarters.” Even with this, the JLL analysts acknowledged that the Q2 vacancy rate remains below that in the years directly before the pandemic. The CBRE Industrial Q2 2023 report pointed out that the vacancy rate is “still below the 10-year average.” Regarding absorption, Lee & Associates’ 2023 Q2 North America Market Report believed that “2023 is on track to post the weakest annual growth in more than a decade.”

Another issue mentioned across the board was construction slow-down. According to Plante Moran Cresa’s 2023 Q2 National Industrial Real Estate Report, manufacturing organizations are pausing growth because of a “bleak economic outlook” while developers grapple with higher interest rates. Additionally, tenants are subletting space as they “right-size facilities amid macroeconomic headwinds,” according to the “State of the U.S. Industrial Market” released by Savills.

The Outlook

The crystal ball analysis suggests that the red-hot market is ending, but there’s no need for panic. Plante Moran Cresa anticipates slowing rent growth due to the expected deliveries in 2023. But Plante Moran Cresa and Lee & Associates’ outlook includes a positive focus on industrial with help from the CHIPS and Science Act of 2022.

JLL analysts concur with a slowing rent growth rate, adding that “a decline in the preleasing rate will “lead to significantly lower absorption levels and a continued rising vacancy rate in the next 6 to 12 months.” On the other hand, fewer groundbreakings will help lead to a better supply/demand balance “in key markets where oversupply could have been a concern,” the JLL report added.

Cushman & Wakefield analysts call for an increase in vacancy due to more supply coming online. Absorption levels will also “remain slightly below pre-pandemic norms in 2023 and 2024 as softer demand for consumer goods coupled with high inflation and interest rates continues to temper growth.” Still, net absorption should remain in the black,” they added.

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