April News Update: The Evolving Industrial Market

During the pandemic, the industrial real estate sector attracted intense interest from investors. Consumers preferred not to venture out for in-person shopping, so e-commerce exploded, and supply chain shortages forced some manufacturing and distribution to return to the U.S.

 

Those tailwinds only served to accelerate rents; industrial real estate experienced big jumps in occupancies and valuations. That was great news for owners and developers of warehouses and manufacturing spaces.

But in commercial real estate, it is impossible to escape the law of cycles. Surges in demand inevitably encourage new supply, and that is what happened in the industrial sector.

 

Demand for industrial space raged in 2021 and 2022, and developers responded logically – by building. The result, Colliers reports, is that 607 million square feet of supply were completed in 2023, nearly three times the total net absorption for the year of 231 million square feet.

 

The sudden flash of heat around industrial space marks a shift in sentiment. For decades, offices and retail got all the attention. Now, though, industrial space is having a moment. In one sign of the times, a property owner in California’s Orange County is tearing down a perfectly good office building and replacing it with warehouse space. The site is near John Wayne International Airport, and the owner calculated that the highest and best use of the property no longer was office space.

 

The dramatic increase in development means supply and demand fell out of balance in 2023. As a result, vacancy rates rose in each quarter of 2023 in every part of the country and in 71 of the 77 industrial markets Colliers tracks. The U.S. average vacancy rate increased by 194 basis points over the year to 5.55% — the highest since the second quarter of 2016.

 

It is a testament to the strength of industrial demand that even after the frenzy of new development, the market remains generally healthy. Despite record new deliveries of space, the national vacancy rate remained well below the 15-year average of 6.4%, Colliers reports.

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A cooling market

For 2024, the outlook is a bit tricky: Vacancies are expected to continue rising before stabilizing at 6.6%. After vacancy rates that fell as low as 3.6% during the pandemic, this new level seems a bit jarring. But here is another way to look at it: Super-tight markets are good for investors only up to a point. When tenants are constantly scrambling to find affordable space for their business needs, hot markets begin to exact a toll. In this softer post-pandemic market, users will have more options, but the market will not be so overbuilt that landlords are forced to slash rents.

 

According to Colliers, average net rents grew by 12% year-over-year during 2023. Rent growth slowed during the second half of the year following several quarters of unprecedented increases exceeding 15% annually.

 

Average net rents in 2023 topped $10 per square foot, a first for the industrial market. In the coastal markets of San Francisco, Los Angeles, and Miami, rents are north of $20. The big price jumps are easing, though. During the next three years, industrial rents are likely to tick up at a pace close to 5%, similar to historical averages, Colliers says.

Partnering with Heritage

The industrial real estate market is ripe with opportunity. The unprecedented surge in e-commerce, the reshoring of manufacturing, and the inherent adaptability of industrial properties underscore their enduring appeal. Heritage Capital's experience allows us to navigate this dynamic sector successfully. 

 

The number of investors chasing industrial properties has skyrocketed. Many are first-time investors who have no prior experience or understanding of industrial real estate. As the industry evolves and demand for manufacturing and warehouse spaces builds, strategically investing in industrial real estate will prove to be an increasingly popular strategy among those who have a trusted, experienced partner by their side. 

 

Here at Heritage Capital Group we manage some 6 million square feet of industrial properties spanning multiple states and have three generations of experience through multiple economic cycles. Learn more about how we find and invest in industrial real estate while maintaining a relentless focus on protecting investor capital in these case studies, here.

POSTED BY

Portrait - Jeff Greenberg

Jeffrey Greenberg

Founder and Managing Partner

Jeff has over 30 years and cumulatively over $2 billion investment experience in commercial real estate for his 3rd generation family office.

'The best way to make money in real estate,' he says, 'is to make it slowly.'

While having a focus on mid-large size, Class A/B industrial facilities across the United States, Jeff invests in opportunities that provide ongoing income with the likelihood of doubling investor capital over time.