CBRE Q1 data points to the staying power of the U.S. industrial real estate market

Going back to the onset of the pandemic in March 2020, it is fair to say that the United States-based industrial real estate market continues to see more than its fair share of activity, which to a large degree continues to reflect the ongoing state of freight transportation and logistics.

That was made clear in first quarter data recently issued by Dallas-based industrial real estate firm CBRE.

As per the usual, the CBRE report was replete with myriad findings and takeaways.

Perhaps the biggest one was that the U.S. industrial real estate market added 89 million square feet (MSF) of vacant supply, in the first quarter, which CBRE said represents the single largest quarter-over-quarter increase on record. What’s more, that subsequently led to the overall vacancy rate seeing an increase for the first time, going back to the second quarter of 2009, with a 50-basis point increase to 3.5% that still trails the 5.0% 10-year average.

So, what drove the 89 MSF uptick in vacant supply? According to Jennifer Suhr, Associate Research Director, Industrial & Logistics Research, it was directly due to speculative, vacant construction delivering in the first quarter, that, in turn pushed up the vacancy rate.

Another key takeaway was that total first quarter construction completions—at 144.1 MSF—marked the second-highest on record, with 43% of those completions occupied by the end of the quarter, below the 73% occupancy rate for completions in calendar year 2022.

Suhr explained that the disparity in occupancy rates is due to what she called “some pause” in the market in relation to leasing first generation space, noting it was particularly evident in what CBRE calls mega big-box facilities—or buildings 500,000 square-feet and above.

“At the same time, we saw near record completions in this size range,” she said. “This caused a discrepancy in available and leased new construction that was larger compared with 2022’s pace.”

The firm said that first quarter under-construction projects headed down for the first time in more than four years, in the first quarter, to 620 MSF, a 7% decrease compared to the fourth quarter 2022—and below 4% on a preleased basis.

The main reason for the decline, according to Suhr, is that obtaining construction financing became more challenging for developers over the last year, resulting in fewer projects having been able to break ground. What’s more, she said that this trend is expected to continue in the coming quarters, which led to an undersupply of first-generation space over the second half of 2022.

And net absorption, which CBRE views as a proxy for demand, came in at 54.2 MSF, for the quarter. This represented the 52^nd consecutive quarter of positive demand, albeit at its lowest amount since the second quarter of 2020, during the depths of the pandemic, and was down 63% compared to the fourth quarter and down 52.6% annually. It also trailed the 10-year 87.6 MSF quarterly average.

“Net absorption in 2021 and 2022 were at record levels due to the rush to lease space to accommodate higher online sales and the need to protect inventories,” said Suhr. “Those numbers were not sustainable. Industrial demand is normalizing with occupancy gains remaining at a robust level, just not the record numbers of the previous years.”

First quarter average asking rent saw a 2.8% quarter-over-quarter increase and an 11.7% annual increase to a new record $9.91 per square-foot, for the second-highest quarterly rent growth on record behind the fourth quarter 2022.

CBRE explained in the report that while the vacancy rate ticked up, rents continued to increase, at a slightly slower pace.

“Demand has been strongest for smaller-sized buildings for 100,000 sq. ft. or less,” the firm said. “This, along with heightened leasing activity in both emerging and hub markets, should sustain double-digit rent growth throughout 2023.”

Even though this data does not keep up with the frenetic pace of activity seen over much of 2021 and 2022, it is nothing to scoff at all the same. Things have changed quite a bit over the last three years. While we are out of the house now, many of us still are leveraging e-commerce, a key driver for industrial real estate growth, while maybe not at the same pace. In any event, it remains a robust market, which CBRE’s data clearly shows.