James Breeze is not blinking. Despite a possible economic slowdown in 2023, the senior director of Industrial & Logistics Research for CBRE predicts: “Drivers of demand will provide some insulation from a downturn, and that will keep overall fundamentals positive.”
In his recorded comments about the U.S. industrial real estate sector, a companion piece to the firm’s 2023 U.S. Market Outlook, Breeze draws a soft line between a true bellringer year and one that’s just really very good. “We’re not going to see the [same] level and volume of leasing activity . . . but it’s still going to be a very good year, maybe the third best year ever on record,” he says.
”While occupiers delay their expansion plans and walk back the pandemic-driven trend of holding additional space, CBRE predicts that in 2023 demand will keep up with supply. This will be “the 13th consecutive year of positive net absorption,” marked by near-record low vacancies, Breeze says, noting that this is well below the 10-year average—by as much as 15%.
This supply/demand dynamic, of course, is a tale of construction starts and completions as much as absorption. Coming off a record year of industrial building—661 million square feet as of Q3—completions in 2023 will likely break records, hiking the vacancy rate by as much as 60 basis points (bps).
But new builds are expected to drop by more than 50%, the CBRE report notes, “due to construction financing challenges and economic uncertainty.” Completions then will drop to around 250 million feet by 2023, which could lead to an undersupply of new space.
Leading the Leasing Charge
Overall leasing activity is likely to moderate—by as much as 15%—this year, but the lion’s share of demand that does remain will be from third-party logistics (3PL) providers, which will account for 40% of the activity by midyear. “Solid leasing activity will keep vacancy rates low, resulting in rental rate growth of approximately 15%,” the report states.
Also fueling leasing demand will be the continued growth of online purchases, in turn fueled largely by “younger shoppers.” As a result, youth-oriented markets and those with growing populations (CBRE cites Nashville, Salt Lake City, Las Vegas, Phoenix and Central Florida) will benefit as more occupiers increase their warehouse presence in those locales.
But this is not the only driver of locational decisions.
Dealing with the Supply Chain
Reshoring and onshoring will also play a role in U.S. activity as companies attempt to “mitigate a host of possible disruptions,” CBRE says, “including shutdowns at Chinese ports, labor issues at U.S. ports, inclement weather and the ongoing war in Ukraine.” A Chinese-plus-one approach to materials sourcing is expected to tamp down some of those disruptions. So will a growing focus on sourcing in Mexico and more stateside manufacturing facilities. Phoenix, Atlanta, Cincinnati, and the major industrial markets of Texas are all on deck to benefit from this trend.
Such a strategy will not only improve delivery times but also shipping costs, which remain above pre-pandemic levels. But domestic freight costs are still expected to climb—a reflection of fuel prices and labor shortages. Offsetting this, occupiers will target markets with strong infrastructures that also offer affordable rents and strong labor numbers. Think Louisville, Memphis, Indianapolis, and Kansas City.
Breeze states that the pandemic years created a new era of industrial real estate. As markets normalize now, under the threat of economic uncertainty, “moderation” becomes a keyword in the outlook for activity.
Nevertheless, the industrial market “is still probably the strongest commercial real estate sector there is,” he concludes, “and I don't see anything that’s going to change that.”
ABOUT THE AUTHOR
John Salustri has covered the commercial real estate industry for more than 30 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.