USA National Industrial Market Report as of October 1, 2023

[Manuel Angeles]

Greetings,

Here is an update on the current National Commercial Industrial Real Estate Market in The United States of America:

U.S. industrial market performance is downshifting heading into late 2023. While the national vacancy rate is expected to remain below its 20-year average of 7.3%, the next 12 months could still prove to be one of the more challenging periods for the market over the next five years.

So far during 2023, net absorption has remained positive but lost steam, with 2023Q2 coming in 30% below second quarter levels averaged during the three years prior to the pandemic. After continuously rebuilding inventories from the fall of 2021 through the fall of 2022, retailers and wholesalers are pausing further inventory accumulation out of caution over the economic outlook causing U.S. imports to decline from record highs. Meanwhile, a swift recovery appears unlikely given the near-term potential for a mild, interest rate-driven recession, which poses downside risks to CoStar's basecase forecast for net absorption in late 2023 and early 2024.

One silver lining is that even when excluding web services, Amazon's North American sales have been rising by double digits and the company is slowing its distribution center closures which began more than one year ago. The recent slowdown in imports has also helped major retailers including Walmart, Target, and Costco clear the excess inventories they accumulated last year. However, drags on household finances including still elevated gas prices, and multi-decade highs in credit card interest rates may need to abate before consumer goods spending can reaccelerate and give retailers the confidence they need to resume distribution network expansions.

Regardless, oncoming new supply is all but certain to push the national vacancy rate up during late 2023 and early 2024. Across the 87 markets that make up CoStar's national index, there is 527 million SF of projects under construction. Most are unleased and set to complete within 12 months. The national vacancy rate has been rising for four consecutive quarters and after reaching a peak of 11.5% in mid-2022, year-over-year rent growth has moderated to 7.4% as of 2023q4. Further deceleration in rent growth seems unavoidable in late 2023 and early 2024, given that landlords will be contending with a record tally of newly built space, at a time when sharp interest rate increases from 2022 and 2023 will likely still be weighing on the economy.

Construction starts on new industrial projects have also been plummeting since last fall, with developers increasingly concerned that higher interest rates are causing the values of newly delivered projects to dip below replacement costs. Given the average construction time of about 14 months for recently completed large industrial projects, this recent pullback in starts signals that by summer 2024, the number of new projects completing construction each quarter will begin to rapidly decline. This may well set the stage for vacancies to stabilize or begin tightening again by late 2024, and for rent growth to accelerate shortly thereafter. CoStar is also tracking more than 20 large electric vehicle, battery, and semiconductor plants planning to open across the U.S. during 2024-26, and suppliers to these facilities will likely generate millions of square feet of additional leasing over that period.

Here are several graphs illustrating the current national commercial industrial market in The United States of America:

Here is the full USA industrial market report for you to review: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1170835/United_States-Industrial-National-2023-10-02_compressed.pdf

Data includes: Sale price per unit distribution, cap rate distribution, cumulative sales volume by year, months to sale, recent significant sales, vacancy rates, market rent per square foot, construction deliveries/demolitions, economy, job growth. population growth, and Los Angeles county sub-market activity.