Industrial Market Observations
1. Tighter Lending Environment, Higher-Priced Debt Impacting the Industrial Market
- Retail spending remains resilient, yet a constricted credit environment exacerbated by recent high profile bank failures may adversely impact consumption.
- Banks continue to dominate industrial property finance in the first quarter of 2023 but are tightening lending standards across the board. The share of banks tightening standards for construction loans rose to nearly 70% in the first quarter of 2023.
2. Economic Challenges Persist but the Industrial Sector Remains on Long-Term Growth Trajectory
- GDP growth slowed in the first quarter of 2023 but stayed positive, a trend likely to reverse in the coming quarters as consensus signals an upcoming mild recession.
- Global supply chain transformation will buoy the market. Advanced manufacturing continues to expand domestically to meet long-term structural needs.
3. While Demand is Decelerating, Overall Market Fundamentals Remain Healthy
- Absorption in the first quarter of 2023 totaled 64.3 msf. This was the best first-quarter total on record compared to pre-pandemic history, but also a 40.4% decline from the fourth quarter of 2022, a larger drop than the typical 5% to 10% decrease from the fourth to the first quarter.
- The 664.4-million-square-foot construction pipeline trended downward for the second consecutive quarter upon record deliveries and sharply decelerating new starts.
- Annual rent growth posted its highest gain yet (21.1%), but forecast scenarios show decelerating, if still strong, rent growth throughout 2023.
4. Capital Markets Continue to Cool
- Sales volume in the first quarter of 2023 dropped nearly 55% year over year, but was right in line with pre-pandemic history, measuring 5.0% above volume in the first quarter of 2019.
- Industrial cap rates saw significant movement, increasing 70 basis points from the prior quarter. The cost of debt will continue to place upward pressure on cap rates over the course of 2023.
- Record industrial loan maturities (heavily concentrated in bank and securitized borrowings) are coming due between 2023 and 2024. However, among all property types, the industrial sector has the lowest share of at-risk securitized debt maturing over this timeframe.