Trying to figure out how the rest of the logistics industry will fare in the future is hard, and predications are made all the more difficult when looking closely at the numbers, but one thing is clear: Industrial real estate continues to thrive.
Mixed signals about the economy are everywhere. It is not unreasonable that the public is concerned about the direction it is heading, especially under the current national leadership which encourages the conclusion we are following a destiny that is not of our choosing.
The IRE services firm of Marcus & Millichap issued its mid-year analysis of the industrial field, seeing continuing strength in the teeth of a tumultuous economy with a questionable future.
“Industrial sales activity is surpassing norms, a standout among property types,” the company’s research analysts explain.
They also note that the Federal Reserve's combined 500-basis-point lift in the overnight lending rate since March of last year has constrained deal making across most property types, which was largely apparent during the first six months of 2023.
“The industrial sector, however, was the only major commercial real estate segment to note a trailing 12-month transaction velocity stronger than its long-term average this June. Moving forward, the sector's historically strong metrics and capital infusions available from recently passed federal statutes, should continue to buoy investor interest.”
The IRE vacancy rate of 4.0% in the U.S. industrial sector was at least 30 basis points below every other major commercial real estate segment in March, M&M reveals.
“A resilient labor market is also propping up wages, buoying retail sales, and fueling needs for warehousing capacity and distribution resources,” the analysts say.
Companies are slated to absorb a net of 330 million square feet of industrial space this year to support their operations, a volume 52% higher than the long-term mean, according to M&M.
“Expansions by large industrial users will aid demand for business-to-business services, also driving leasing activity for available space near these companies' new operations,” they observe,” “This overall dynamic will keep national vacancy well-below any reading prior to 2021, despite a second consecutive year of record-level construction in 2023.”
While both supply and demand are above normal levels, some of the drivers of space use are moderating this year, the company warns. The three-month average imports and exports measurement fell by $2.6 and $2.2 billion in May.
This softening cut the growth in retailer inventories to one-third of the rate registered from last August. Warehousing demand is easing from 2022's peak as a result, positioning industrial vacancy to bump up near-term, M&M reports.
“Looking to 2024, a slowdown in deliveries is anticipated, helping cap further rises in this metric,” the analysts say.
M&M notes that less than 80 million square feet was underway in June with completion dates slated for beyond this year, compared to volumes over 400 million square feet in both 2022 and 2023.
“The ease in new supply should steer expanding industrial tenants to available facilities, limiting upward pressure on the national vacancy rate longer-term,” the researchers predict.
Workforce Housing Is Key
The analysts stress that metropolitan areas capable of attracting IRE investments have certain characteristics in common, and the most important of these is their willingness and ability of workers to live in the areas where they work.
“Metros amenable to the creation of workforce housing are attracting expanding tenants, as well as investors seeking acquisitions in growing economies,” they point out. “Metro-level, and even submarket-specific housing dynamics, which are often key to worker satisfaction, could play a larger role in influencing companies' production expansion plans moving forward.”
The Charlotte, NC, and Las Vegas, markets expected to register historic multifamily growth in 2023, had some of the only year-over-year jumps in industrial transaction velocity among major metros in the first quarter.
“With slowing overall U.S. migration also easing freight utilization in some areas, investors may key-in on local demographics, aiding interest for last-mile warehouses in metros with standout growth trends like Orlando and Dallas-Fort Worth,” the M&M analysts contend.
“A rush to warehouses and distribution assets is also occurring around some of the nation's strongest shipment hubs, shoring up deal flow in Los Angeles and Chicago, where total throughput volumes remain higher than in 2019.”