Economic Conditions and Demand Drivers
- Despite a panorama of recession signals, the U.S. economy expanded 3.1% from a year earlier due in large part to stronger than expected consumers. Expansion may continue albeit at a slower pace in 1Q24.
- A persistently constricted credit environment, elevated interest rates, and shifting consumer demand is causing a significant uptick in bankruptcies, which has contributed to some sublease space and vacancies in the industrial market.
- Starting in late 2023 and continuing into early 2024, geopolitical issues are supplanting economic efficiency as the primary driver for movement of goods in global supply chains, with implications for the U.S. industrial market.
Leasing Market Fundamentals
- Nationally, absorption measured 56.3 msf in the final quarter of 2023, a stronger close to the year. Preleased construction deliveries contributed substantially to quarterly net absorption.
- Annual deliveries measured 564 msf, an all time high. The construction pipeline has depleted substantially amid sharply decelerating new starts although at 455 msf, it is still 37% above 2019 measures.
- Asking rent growth has decelerated, measuring 8.2% annually from double digit growth realized earlier in the year. Contract rent growth has slowed further.
Capital Markets
- 4Q23 marked the sixth consecutive quarter of significant annualized declines in industrial capital markets volume, with users – a small slice of the pie - the only investor group to increase acquisitions in 2023 versus 2022.
- Private-market industrial cap rates have increased 100 basis points in total from the end of 2022. Cap rate and BBB bond yield measures were 5.4% at the close of 2023 - no longer mired in negative leverage, but spreads remain well below long-term averages.
- Record industrial loan maturities (heavily concentrated in bank and securitized borrowings) are coming due. However, among all property types, the industrial sector has the lowest share of potentially troubled loans maturing over this timeframe. The larger challenge will come from debt service covenants where 47% of upcoming maturities have DSCR of 1.25x or less.
Outlook
- Economic uncertainty continues to exert pressure on consumers, developers, occupiers and investors. Demand for industrial space will likely remain resilient but muted going into 2024.
- Vacancy will increase further as historically elevated volumes of new construction deliver over the first half of 2024. Supply – both in deliveries, and in development – will fall back to pre-pandemic levels by 2025, and possibly sooner, depending on how few projects kick off during the next few months.
- Unpredictability in the global supply chain will drive long-term demand for U.S. industrial space due to the need for diversified sourcing and ports of entry to control for cost and speed. The immediate impact of acute global supply chain developments on leased industrial space is likely to be a mild but net positive in 2024.
