Interest rates

As the industrial sector sizzles, investors watch the impact of inflation and interest rates

Even though e-commerce has slowed somewhat, the industrial market in the United States continues to attract investor interest as new construction and adaptive reuse catch up with demand, according to CommercialEdge. National Industry Reportwhich he released earlier this month and covers the first half of 2022.

The national industrial vacancy rate in June was 4.6%, down 10 basis points from the previous month. The lowest vacancy rates were recorded in California’s Inland Empire (0.6%), Columbus (1.4%), Los Angeles (1.9%) and Nashville (2.1%).

“The supply of new industrial space cannot keep pace with demand, a problem more pronounced in areas where geography limits the amount of land available for development. Port markets, and Southern California in particular, are most susceptible to this problem,” the report said.

This is despite the fact that 667.5 million square feet of new industrial park was under construction nationwide and another 684.6 million square feet are in the planning stages. The first half of the year saw 159.6 million square feet of deliveries recorded by CommercialEdge. Dallas has shipped the most new inventory by far in 2022 so far, with 15.9 million square feet completed, more than second (Indianapolis, with 7.9 million square feet) and third (Phoenix, 7.7 million square feet) of the most active markets combined.

Developers and their AEC partners are accelerating the construction of new supplies for the booming industrial market. Image: Commercial Edge

Indianapolis, a logistics hub due to its central location, with access to interstate highways and the world’s second largest FedEx hub, has become a hotbed of new development. Indianapolis has the nation’s fifth-largest pipeline by area and second-largest by percentage of existing stock. The largest ongoing project is a 2.2 million square foot Walmart distribution center that began construction in 2020 and is expected to be delivered later this year. The vast majority of projects in Indy are logistics parks, whether new complexes or extensions of existing complexes.

ASCEND

The scarcity of land leads to new modes of operation on the part of both occupants and developers. Multi-storey buildings have garnered more interest, although their main constraint is cost, with estimates pegging a multi-storey building at 40% more expensive than a single-storey property with an equivalent amount of space. But multi-story projects have been popping up in the New York metro area. CommercialEdge points to a joint venture between Turnbridge Equities and Dune Real Estate Partners that will develop the Bronx Logistics Center, a 500,000 square foot multi-story building with 800,000 square feet of parking between a garage and the roof.

Outdoor storage is also used to fill supply chain gaps where there is a lack of sufficient land for industrial properties, with outdoor land being increasingly used by e-commerce and logistics companies.

The lack of land is leading some developers to consider converting former office and retail space into industrial premises. Conversions remain rare at the moment, but could increase in the future as land in coastal markets becomes scarce.

Sales by market of industrial buildings
Southern California continues to be the hottest real estate market for industrial buildings. Image: Commercial Edge
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STRONG RENT GAINS

As demand outstrips supply, average in-place rents for industrial buildings in June rose 4.9% year-over-year to $6.57 per foot. The average cost of a new lease signed in the past 12 months was 88 cents per foot higher than the overall average.

CommercialEdge reports that supply conditions have improved lately, with backlogs at ports easing in recent months and energy and commodity prices falling in recent weeks. But inflation remains well above target. CommercialEdge correctly predicted that the Federal Reserve would thwart inflation with higher interest rates, which the research firm says could also cause supply and trading markets to cool as the cost of capital increases.

Higher interest rates could dampen transactions and new construction.  Image: Commercial Edge
As the Fed raises interest rates, the rising cost of capital could dampen sales and construction in the industrial sector. Image: Commercial Edge

Nationally, there were $39.6 billion in deals in the industrial sector in the first half of the year, according to CommercialEdge. The average price per square foot for an industrial building in the second quarter was $138, up 12.4% from the first quarter and 31.3% year over year. The second quarter was the seventh consecutive quarter with rising average selling prices. The average sale price of an industrial property has increased by 67% during this period.

With the lowest vacancy rates in the country and the strongest growth in rents, investors are hungry for assets in the Inland Empire. A total of $1.7 billion in industrial sales have come to market so far this year, and the average selling price of industrial properties has more than doubled over the past two years, from $138 per foot in 2020 to $299 per foot in 2022. The most popular submarket in 2022 is Fontana, California, where 11 industrial properties sold for over $500 million in the first half of this year.