Rising Industrial Rents Defy Industrial Space Supply Surplus
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
Despite the 47% year-over-year decline in US industrial leasing in terms of square footage, demand remains potent, primarily driven by the rapid growth of e-commerce.
With the acceleration of digital shopping, businesses are placing greater emphasis on maintaining substantial inventory, necessitating larger warehouses, although a slowdown in 2023 warehouse demand has not been unexpected.
Reshoring of Manufacturing and Demand for Industrial Space
Commensurately, the reshoring of manufacturing—companies relocating their manufacturing facilities back to the US—is contributing significantly to the demand for industrial space.
As businesses strive to minimize disruptions in supply chains and insulate themselves from geopolitical uncertainties, reshoring efforts have gained momentum.
However, these strong demand factors have yet to entirely catch up with the increased supply of industrial space, contributing to a slower leasing pace this year.
Increased Supply of Industrial Space: A Challenge to Absorption
The supply of industrial space is on the rise, outpacing the robust demand. Despite a healthy 121.1 million square feet of net absorption in the US industrial market in the first half of 2023, there was still a notable decline in leasing activity.
The increased supply, coupled with slower absorption rates, has resulted in a slight uptick in the national vacancy rate, which stood at 4.5% in June 2023, 20 basis points up month-over-month. This trend is an indicator that the supply-demand balance in the industrial property market is undergoing a shift, contributing to a softening leasing market.
Industrial Rents: Record Growth Amid Market Headwinds
Interestingly, amidst the leasing slowdown, industrial rents have experienced a record pace of growth, averaging $7.33 per square foot in the first half of 2023, up 7.4% year-over-year.
This increase is indicative of the overall strength of the US industrial property market as suggested by rising industrial rents and the strength in e-commerce, despite some potential headwinds.
However, potentially reinvigorated inflation and higher interest rates are expected to impact the market negatively. Inflation could put additional upward pressure on rents, making leasing industrial spaces more expensive.
On the other hand, higher interest rates might decelerate development and investment in the sector, potentially resulting in a concurrent slowdown of e-commerce, manufacturing and supply and demand for industrial space.
Mismatches in Supply and Demand Suggest Timing Discrepancies
Despite the marked slowdown in industrial leasing activity, the US industrial property market is far from feeble. A thriving e-commerce sector, an increased emphasis on reshoring, and rising industrial rents underline its resilience.
However, there are significant challenges ahead. The sector must work toward aligning the increased supply of industrial spaces with robust but slower-moving demand. Furthermore, the industry needs to navigate the complexities introduced by rising inflation and interest rates.
The evolving dynamics of the industrial property market demonstrate the need for adaptive strategies to ensure growth and profitability in a changing economic landscape.
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