Commercial Real Estate News
America's Industrial Market Experiences Sharp User Demand Declines in Early 2023
According to new research by national commercial property broker Lee and Associates, there was a sharp first-quarter decline in U.S. tenant demand for industrial space as wholesalers and retailers reconsider their inventory levels out of caution over the economic outlook. Net absorption in the first quarter totaled 39.4 million SF, a 57% drop from the record set a year ago. Demand for Canadian industrial space in Q1, however, gained nearly 21% year over year. The overall U.S. vacancy rate settled at 4.4%, an increase of 40 basis points from the close of 2022, comfortably below the 7.3% market average over the last two decades. Vacant space at the end of March totaled 805.6 million SF, up 81.4 million SF from the previous quarter.
Lee and Associates further reports a potential pullback in consumer spending poses downside risks for 2023, onshoring of high-tech manufacturing will likely be a key driver of U.S. absorption from 2024-26. The federal government's 2022 passage of the CHIPS and Science Act, and the Inflation Reduction Act provided more than $400 billion worth of incentives for growth in U.S.-based high-tech manufacturing. Newly completed space in the first quarter totaled 120.3 million SF compared to 74 million SF delivered in the same period last year. The stock of U.S. industrial property is set to grow nearly 4% in 2023 for the fastest pace of supply growth in more than 30 years. Barring a severe shock to the U.S. economy and industrial leasing, the volume of space set for delivery likely will produce only a moderate increase in vacancy without tipping the market in the tenants' favor. Influencing long-term prospects, increased interest rates of the past two quarters and concern that the increased cost of new construction may exceed replacement cost have caused developers to pull back by up to 40% starting late last year. The recent slowing in net absorption is broad-based across most major markets. Los Angeles and Southern California's Inland Empire - with respective vacancy rates of 3.4% and 3.1%, similar to other coastal markets - notably have posted outsized increases in space availability in recent months. Otherwise, the construction pipeline of projects is barely enough to meaningfully ease the space shortages in the majority of coastal markets since the lockdown.
Imports have been declining at the national level since November. The slowing has been most pronounced at the Port of Los Angeles, where inbound cargo has been reduced by the Covid wave in China and risks of a strike by West Coast dockworkers. The potential strike has caused many importers to divert cargos to major East Coast ports, allowing East and Gulf Coast ports such as Newark, Savannah, Houston, Norfolk and Charleston to lead the U.S. in import growth since the Great Recession.
Lehigh Valley, Richmond, Tampa, Jacksonville, Detroit and Reno have bucked the national trend and record tightening availability since mid-2022, even among properties larger than 100,000 SF. U.S. and Canadian landlords in Q1 are expecting annualized 9.9% and 14.1% rent growth respectively. But those gains appear less likely to materialize as 2023's record levels of deliveries will see 250 million SF added in the second quarter and 650 million SF projected this year.
