flexiblefullpage -
billboard - default
interstitial1 - interstitial
catfish1 - bottom
Currently Reading

As industrial sector sizzles, investors watch impact of inflation and interest rates

Industrial Facilities

As industrial sector sizzles, investors watch impact of inflation and interest rates

Demand continues to top supply, especially on the coasts, according to latest CommercialEdge report.


By John Caulfield, Senior Editor | July 26, 2022
KIndeva Drug Delivery in Woodbury, Minn.
Ryan Companies provided the architecture, engineering, core-and-shell construction, and landscaping for Kinteva Drug Delivery, a 137,897-sf industrial facility in Woodbury, Minn., that was completed last year. Image: Kruger Image

Even as ecommerce has moderated somewhat, the industrial market in the U.S. continues to attract unrelenting investor interest, as new construction and adaptive reuse play catch-up with demand, according to CommercialEdge’s National Industrial Report, which it released earlier this month and covers the first half of 2022.

The national industrial vacancy rate in June was 4.6 percent, falling 10 basis points from the previous month. The lowest vacancy rates were in California’s Inland Empire (0.6 percent), Columbus (1.4 percent), Los Angeles (1.9 percent) and Nashville (2.1 percent).

“Supply of new industrial space cannot maintain pace with demand, a problem more pronounced in areas where geography limits the amount of land available for development. Port markets, and Southern California in particular, are most attuned to this issue,” the report states.

This despite the fact that 667.5 million sf of new industrial stock were under construction nationally, and an additional 684.6 million sf are in the planning stages. The first half of the year saw 159.6 million sf of deliveries logged by CommercialEdge. So far, Dallas has by far delivered the most new stock in 2022, with 15.9 million sf completed, more than the second (Indianapolis, with 7.9 million sf) and third (Phoenix, 7.7 million sf) most-active markets combined.

 

Developers are racing to keep pace with industrial demand. Image:CommercialEdge
Developers and their AEC partners are accelerating construction of new supply for the burgeoning industrial market. Image: CommercialEdge
 

Indianapolis—a logistics hub due to its central location, with access to interstate highways and the second-largest FedEx hub in the world—has become a hotbed for new development. Indianapolis has the fifth-largest pipeline in the nation by square footage and the second largest by percentage of existing stock. The largest project underway is a 2.2 million- sf Walmart Distribution Center that began construction in 2020 and is set to deliver later this year. The vast majority of projects in Indy are logistics parks, both new and expansions of existing complexes.

GOING UP

Land scarcity is leading to new modes of operation from both occupiers and developers. Multistory buildings have garnered more interest, although their main constraint is cost, with estimates pegging a multistory building at 40 percent more expensive than a single-story property with an equivalent amount of space. But multistory projects have been popping up in the New York metro area. CommercialEdge points to a joint venture between Turnbridge Equities and Dune Real Estate Partners that will develop Bronx Logistics Center, a 500,000-sf multistory building with 800,000 sf of parking between a garage and the roof.

Outdoor storage is also being used to fill gaps in the supply chain when there is a lack of sufficient land for industrial properties, with outdoor lots increasingly used by e-commerce and logistics companies.

The lack of land is leading some developers to consider conversions of old office and retail space into industrial. Conversions remain rare at the moment, but may increase in the future as land in coastal markets becomes scarcer.

 

Sales by market of industrial buildings
Southern California continues to be the hottest real estate market for industrial buildings. Image: CommercialEdge
​​​​

STRONG RENT GAINS

As demand exceeds supply, the average in-place rents for industrial buildings in June grew 4.9 percent year-over-year to $6.57 per foot. The average cost of a new lease signed in the last 12 months was 88 cents higher per foot than the overall average.

CommercialEdge reports that supply conditions have improved of late, with backlogs at ports easing in the last few months and both energy and commodity prices falling in recent weeks. But inflation remains well above target. CommercialEdge correctly predicted that the Federal Reserve would counter inflation with higher interest rates, which the research firm speculates could also lead to new supply and transaction markets cooling as the cost of capital increases.

 

Higher interest rates could put a crimp in transactions and new building. Image: CommercialEdge
As the Fed raises interest rates, the higher cost of capital could put a crimp in sales and construction in the industrial sector. Image: CommercialEdge
 

Nationally, there were $39.6 billion in industrial-sector transactions during the first half of the year, according to CommercialEdge. The average price per square foot of an industrial building in the second quarter was $138, up 12.4 percent over the first quarter and 31.3 percent year-over-year. The second quarter was the seventh straight quarter with in- creasing average sale prices. The average sale price of an industrial property increased 67 percent during that time.

With the lowest vacancy rates in the country and the highest rent growth, investors are hungry for assets in the Inland Empire. In all, $1.7 billion of industrial sales have been completed in the market so far this year, and the average sale price of industrial properties has more than doubled in the last two years, from $138 per foot in 2020 to $299 per foot in 2022. The most popular submarket in 2022 is Fontana, Calif., where 11 industrial properties have sold for more than $500 million through the first half of this year.

Related Stories

Data Centers | Feb 28, 2024

What’s next for data center design in 2024

Nuclear power, direct-to-chip liquid cooling, and data centers as learning destinations are among the emerging design trends in the data center sector, according to Scott Hays, Sector Leader, Sustainable Design, with HED. 

Designers | Feb 23, 2024

Coverings releases top 2024 tile trends

In celebration of National Tile Day, Coverings, North America's leading tile and stone exhibition, has announced the top 10 tile trends for 2024.

MFPRO+ News | Feb 15, 2024

UL Solutions launches indoor environmental quality verification designation for building construction projects

UL Solutions recently launched UL Verified Healthy Building Mark for New Construction, an indoor environmental quality verification designation for building construction projects.

Industrial Facilities | Jan 29, 2024

How big-ticket, government-funded investments in industrial developments are affecting private construction companies

Large sums of money remain in bank accounts for government-funded programs like the CHIPS Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act. But with opportunities come challenges. 

Self-Storage Facilities | Jan 25, 2024

One-quarter of self-storage renters are Millennials

Interest in self-storage has increased in over 75% of the top metros according to the latest StorageCafe survey of self-storage preferences. Today, Millennials make up 25% of all self-storage renters.

Industry Research | Jan 23, 2024

Leading economists forecast 4% growth in construction spending for nonresidential buildings in 2024

Spending on nonresidential buildings will see a modest 4% increase in 2024, after increasing by more than 20% last year according to The American Institute of Architects’ latest Consensus Construction Forecast. The pace will slow to just over 1% growth in 2025, a marked difference from the strong performance in 2023.

Industrial Facilities | Nov 14, 2023

Some AEC firms are plugging into EV charging market

Decentralized electrical distribution is broadening recharger installation to several building types.

Industrial Facilities | Nov 1, 2023

A new concept for multistory warehouses focuses on efficiency

Ware Malcomb’s design idea suggests drone delivery, automated stacked packing, and a sustainable building.

Warehouses | Oct 19, 2023

JLL report outlines 'tremendous potential' for multi-story warehouses

A new category of buildings, multi-story warehouses, is beginning to take hold in the U.S. and their potential is strong. A handful of such facilities, also called “urban logistics buildings” have been built over the past five years, notes a new report by JLL.

Giants 400 | Oct 11, 2023

Top 100 Industrial Construction Firms for 2023

ARCO Construction, Clayco, Walbridge, and Gray Construction top the ranking of the nation's largest industrial facility sector contractors and construction management (CM) firms for 2023, as reported in Building Design+Construction's 2023 Giants 400 Report.

boombox1 - default
boombox2 -
native1 -

More In Category

Data Centers

What’s next for data center design in 2024

Nuclear power, direct-to-chip liquid cooling, and data centers as learning destinations are among the emerging design trends in the data center sector, according to Scott Hays, Sector Leader, Sustainable Design, with HED. 




halfpage1 -

Most Popular Content

  1. 2021 Giants 400 Report
  2. Top 150 Architecture Firms for 2019
  3. 13 projects that represent the future of affordable housing
  4. Sagrada Familia completion date pushed back due to coronavirus
  5. Top 160 Architecture Firms 2021