Industrial Real Estate Outlook 2023: Trends and Opportunities to Watch
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
The industrial real estate sector is expected to continue its positive performance in 2023, despite signs of tempering fundamentals in the latter half of 2022, according to experts. Onshoring efforts and the boom in e-commerce have added to the already high demand for industrial real estate. However, the Federal Reserve's inflation-induced monetary policy tightening has led to a near-term economic slowdown and a softening of the labor market, resulting in a reduction in absorption, rent growth, and sales activity. Despite this, investor and occupier demand remain high.
Strong Performance Expected for Industrial Real Estate Sector in 2023 Despite Cooling Fundamentals in 2022
One challenge for industrial developers and providers going forward is labor shortages and rising construction material costs, which could impact construction durations and increase finished construction costs. Steel, concrete, and roofing materials typically contribute up to 80% of shell costs, and price surges for these materials have generated a 50% rise in finished construction costs since 2019. Developers may prioritize direct partnerships with material suppliers and optimized scheduling to address this challenge. Automation tools may also become increasingly important for larger-scale projects, though they are not yet economically viable for many users.
Obstacles for Industrial Developers and Service Providers in 2023
New opportunities for the industrial sector have arisen as manufacturers focus on bringing production lines to North America, if not US soil, and reducing reliance on imported goods. Major investments announced in 2022 include Micron's $100 billion commitment in New York, Intel's $20 billion chip factory project in Ohio, and Texas Instruments' $30 billion chip plant in North Texas. Developers are showing high confidence in industrial real estate prospects, with the combined 2 million square feet Bristol Highlands Commerce Center in Bristol, WI, and Highland Commerce Center of Somers, in Kenosha, WI being developed on a speculative basis.
Shifts Away From Major Ports Could Benefit Smaller Ones
E-commerce supply chains will also need to become more resilient, with demand for distribution space likely to remain high as consumers continue to prefer online shopping. Markets' connections to global supply chains will be a differentiating factor in 2023. U.S.-based production and congestion at the largest seaports have directed more shipping activity toward other points of entry in the country. Industrial real estate properties in San Diego, San Antonio, and Detroit are expected to benefit from their proximity to U.S. entry points, while seaport expansion will likely pay off for markets like Jacksonville, Philadelphia, Baltimore and Charleston, S.C.
Industrial Assets Expected to be Top Performers in 2023
The picture for the industry is still favorable going into 2023, despite the fact that the fundamentals of the industrial market cooled off in the second half of 2022. According to data from CommercialEdge, industrial assets are expected to continue performing strongly, with the total amount of space under development in the U.S. reaching an all-time high of 713.6 million square feet as of October 2022. In-place rentals increased by 6.2% year-over-year through October to an average of $6.95 per square foot, reflecting investors' desire for high-growth markets.
The industrial sector will still need to overcome obstacles in the upcoming year, however. For industrial developers and service providers, the biggest concerns include rising building material costs, a labor shortage, and lengthening construction schedules. Roofing, concrete, and steel expenses often account for up to 80% of shell costs, and price spikes since 2019 have caused finished building costs to rise by 50%. In the meantime, the sector's construction lead times have gotten longer, and contractor backlogs are happening more frequently. Prioritizing long-lead building supplies and forging close ties with material suppliers can help developers optimize scheduling.
Industrial Property Has Punched Above Its Weight
Industrial assets are expected to be among the top performers across the commercial real estate sector in 2023, with deliveries expected to remain at an all-time high. In-place rents rose by a solid 620 basis points year-over-year through October 2022, with the highest gains in port markets such as the Inland Empire, Los Angeles, and Boston. Although investors grew more cautious due to large-magnitude, and consecutive interest rate hikes, transaction volume for industrial warehouses was up 11% year-over-year through Q2 of 2022, with industrial and distribution facilities among the most favored investment prospects for four of the past five years.
Americans Racing to Re-shore and Friend-shore Industrial Capacity
As world events continue to validate the United States' accelerating pullback from the global economy, Americans are racing to re-shore and friend-shore (to Mexico, Canada or Colombia) the industrial capacity they could otherwise find themselves without as the process unfolds. This largely unacknowledged driver of industrial property support also sews the seeds of more attractive industrial margins in future years, as new construction with better technology yields more output per unit of input.
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