NAI Global July 2023 Logistics Journal

July 2023 // NAI DESCO Blog

Trends and Insights on Industrial Real Estate by Experts in Multiple Markets

U.S. Industrial Markets
The recent industrial and logistics virtual meeting hosted by NAI Global and moderated by Steve Pastor with NAI James E. Hanson in Teterboro, New Jersey, covered some of the latest market activity in over a dozen primary U.S. industrial territories.

Foremost, the hypersonic speed with which the industrial real estate market had been traveling 18 months ago (3500 mph is hypersonic speed) has returned to the average speed a passenger jet flies at 35,000 feet, or 663 mph. That is also the speed of sound, and hence, an appropriate metaphor for the industrial real estate market. It’s still the highest performing commercial real estate property type by asset class.

During the July meeting, industrial specialists in numerous markets said that developer pencils were down in terms of underwriting new deals. The usual suspects – the cost of capital and construction costs, are to blame. As we have reported in these pages previously, capital is scared and the market is moving cautiously, which is a reflection of corporate America at the moment. For example, near Oklahoma City, a large automotive company was close to pulling the trigger on a 30-acre parcel that came with a 20,000-square-foot facility, then got the call from HQ: put it on hold, their local representatives were told.

Several brokers spoke of challenging leasing conditions this summer, with buildings between 100,000-300,000 square feet taking longer to get across the finish line and closed, while deals over 400,000 square feet are increasingly rare. It was noted that industrial product in the 250,000-square-foot range was practically commodity space two years ago.

The slowdown is causing ultra-low vacancy rates to rise ever so slightly. In Seattle, the mark reached 5.1% at the end of the second quarter, up from 4% a year-and-a-half ago. The Puget Sound industrial market has 2 million square feet of sublease space on the market, compared with none at the beginning of 2022.

Likewise, the vacancy rate crept past 7% in Dallas, where a steady supply continues to give occupiers options. So far this year, there has been 30 million square feet of industrial supply delivered (of which 20% is pre-leased) and there is another 64 million square feet under construction. Rents are holding up, however, with rent-growth just under 10% metro-wide yet still over 10% on a year-over-year basis in the core industrial submarket around the airports (Dallas Ft. Worth International and Dallas Love Field).

Further south, in Houston, leasing velocity is slowing yet still robust by any measure, with Bayou City’s net absorption on track to exceed 18 million square feet in 2023. Houston is one market where activity remains elevated for buildings between 100,000 square feet and 300,000 square feet, with approximately 40 deals signed in that range, year-to-date. The Baytown submarket had its first deal done over 500,000 square feet, with a 3PL operator underway on a build-to-suit for 600,000 square feet of logistics space.

The mention of a big 3PL deal and earlier reference to a car company holding off on a land deal in Oklahoma motivated one of the meeting participants to call the current market ‘weird,” because on one hand you have corporations reducing their commitments on new space, yet 3PLs are driving demand in markets throughout the U.S. It wasn’t said, per se, but this is classic outsourcing as a fundamental way to manage operations while reducing risk by doing business on a contract-basis versions more buying and leasing permanent facilities and making fixed-cost commitments.

There was an active conversation during the meeting on rental rate growth and slowdown in development activity, with a broad consensus that with limited supply in most U.S. markets, rents are expected to remain elevated and the lack of new supply by late 2024 is going to put even greater pressure on existing supply. Rents are growing over 4% annually in Charleston, for example, and that’s a market that has never seen rent growth over 3.75% year-over-year.

The EV Battery and semiconductor chips industries continue to drive demand for industrial real estate. Wolfspeed, a Durham, NC-based developer and manufacturer of wide-bandgap semiconductors, is looking for new facilities in multiple North Carolina submarkets. A Korean EV batter manufacturer is eyeing a 1.2-million-square-foot in Nevada and another battery maker that serves the solar panel/solar power and automotive industries is conducting a site selection search for a 1-million-square foot facility in the Southeast and another facility of similar size in a western market with the exclusion of California.

In other industry news this summer, for the first time in about 10 years the red-hot Inland Empire market in Southern California had negative net absorption for the second quarter. It was a just a couple of million square feet and likely just a timing matter, with more space delivered during the period than leased. Industrial bellwether Prologis, meanwhile, completed another large acquisition by closing on a $3.1 billion portfolio from seller Blackstone. The 14-million-square-foot portfolio has some 70 properties in Southern California, Atlanta, Dallas and Washington, D.C.

Thought Leaders

  • Steve Pastor, NAI James E. Hanson, Teterboro, NJ
  • Michael Stanzel, SIOR, NAI Robert Lynn, Dallas, TX
  • Adam Roth, SIOR, CCIM, NAI Hiffman, Chicago, IL
  • Brian Armon, SIOR, CCIM, NAI Alliance, Reno, NV
  • Hal Johnson, SCCED, NAI Earle Furman, Greenville, SC
  • Lee Black, NAI Nashville, Nashville, TN
  • Jeff Wilke, SIOR, LEED AP, NAI Latter & Blum, New Orleans, LA
  • Joey Ferguson, NAI Swisher & Martin Realty, Laredo, TX
  • Daniel Slote, NAI Platform, Albany, NY
  • Ken Lundberg, SIOR, NAI James E. Hanson, Teterboro, NJ
  • Jon Hickey, NAI Emory Hill, New Castle, DE
  • Mark Wardlaw, NAI Fortis Group, Louisville, KY
  • Bryce Custer, SIOR, CCIM, NAI Spring, Ohio and W. Virginia
  • Tyler Culberson, NAI Platform, Albany, NY
  • Fred Meyer, SIOR, NAI Mertz, Mt. Laurel, NJ
  • Ed Brown, SIOR, CCIM, NAI Tri Properties, Raleigh, NC
  • Mike Chambers, NAI Brannen Goddard, Atlanta, GA
  • Matt Osowski, SIOR, NAI Ohio Equities, Columbus, OH
  • Mike Adams, NAI Summit, Allentown, PA
  • Michael Royce, NAI KLNB, Tysons, VA
  • Christian Davey, CCIM, SIOR, NAI Cressy, Indianapolis, IN
  • Bob Sullivan, NAI Sullivan Group, Oklahoma City, OK
  • Clark Everett, NAI Sullivan Group, Oklahoma, City, OK
  • Steve Martens, CPM, CCIM, SIOR, NAI Martens, Wichita, KS
  • Jim Caronna, SIOR, NAI KLNB, Baltimore, MD
  • Jeff Licht, SIOR, NAI Mertz, Philadelphia, PA
  • Nick Peterson, SIOR, NAI Robert Lynn, Houston, TX