Looking to buy or lease a facility for your business? Take a look at the Q4 National report for the US

National Market Report

Looking to buy or lease a facility for your business? Take a look at the Q4 National report for the US


Heading into 2023, U.S. industrial leasing activity continues to hold near record highs, up a remarkable 60% compared to pre-pandemic levels. Even as North America’s largest industrial user, Amazon, has pumped the brakes on its distribution network expansion, continued elevated levels of consumer goods spending, combined with record high levels of imports, are still driving voracious demand for distribution space from retailers and third-party logistics firms. However, some signs are emerging that Amazon’s pullback in new leasing, combined with accelerating completions of speculative development projects, is beginning to weigh on the market. While existing industrial space listed as available for lease plummeted during 2021, it has essentially flat-lined at record lows this year and even inched up very slightly in the third quarter. Among post-2010-built distribution centers over 500,000 SF, existing space available for lease is rising quickly as speculative development projects are beginning to complete in larger numbers. This could be a sign of a potentially more challenging leasing environment to come for the largest new developments underway in markets such as Dallas-FW, Phoenix, and Indianapolis, where the current tally of unleased square footage under construction is more than twice those respective markets’ average annual absorption rates over the previous five years. At 10.8% year over year as of 2022q4, U.S. industrial rent growth remains near record highs with concessions still very low by historical standards. However, during the third quarter, the pace of quarterly rent growth did moderate to 2.3%. While still a very strong growth figure by historical standards, this marked the first-time quarterly rent growth has meaningfully decelerated in more than two years, a sign that rent growth is beginning to trend back down to levels recorded prior to the pandemic.


U.S. industrial leasing has held up remarkably well in recent months, even as rising inflation and interest rates have begun to wear on the broader economy. Preliminary readings indicate U.S. industrial leasing totaled 320 million SF during 2022q3, closely in line with the record-high level of leasing that the market has been maintaining for the past six quarters, and up more than 60% from typical third quarter leasing observed during the three years prior to the pandemic. This has helped hold the U.S. industrial vacancy rate near all-time lows in recent months, although it has inched up by a very modest 10-20 basis points since spring 2022. Consumer goods spending has declined from unsustainably high levels recorded during early 2021 when the third and final round of stimulus checks were issued. However heading into late 2022, even when adjusted for recent inflation, monthly goods spending continues to come in about 6% higher than levels that would have been recorded, had spending not spiked in recent years and simply continued to rise in line with its pre-pandemic growth trend. Meanwhile, containerized imports coming into U.S. seaports have continued to hit record highs in recent months. All told, households are still spending aggressively on physical goods and record volumes of imports are entering the U.S., fostering very strong demand for distribution space to sort and package these goods as they make their way to consumers. Markets that have recorded an acceleration in leasing year to date in 2022, compared to the same period in 2021, include the largest East Coast ports such as Charleston, Savannah, and Norfolk, as well as markets such as Reno, Phoenix, and even the San Francisco Bay Area, which are all benefitting from their ties to high tech manufacturing and research and development. These are promising signs for longer-term leasing prospects in these markets, as a wave of electric vehicle and battery plants were already planned to open across the U.S. by 2024–25, even before the Inflation Reduction Act committed more than $300 billion in tax credits and government spending toward a broad range of initiatives to boost domestic manufacturing in clean tech industries. Risks that industrial leasing will moderate back down toward more normal levels in 2023 are accumulating. Stubbornly high inflation is eroding household purchasing power, and leading indicators of U.S. economic growth including housing permitting, the yield curve, and consumer expectations for business conditions have been flashing warning signs since the Federal Reserve began raising interest rates during early 2022. However, when considering the outlook for consumer spending and industrial space demand, these concerns also need to be weighed against the reality that the U.S. has just been through an historic boom in saving and most households have increased employment security as a result of a deeply entrenched labor shortage that has worsened since 2019. Amazon, which accounted for 15%-20% of North American industrial absorption during 2020–21 by CoStar estimates, has clearly pumped the brakes on its distribution network expansion, canceling a range of development projects and even putting more than 6 million SF worth of existing distribution centers back on the market, either through sublease or by letting leases expire. So far, Amazon has disproportionately shed its smaller, older distribution space in locations where the firm has recently leased larger, more modern distribution centers nearby. The e-commerce giant has also been careful to close few, if any, of its existing distributions in mission critical distribution markets with the least amount of available space, including Southern California, Northern New Jersey, and Eastern Pennsylvania’s I-81/I78 corridor.


At 10.8% year over year, U.S. industrial rent growth is near the highest levels CoStar has ever recorded. Concessions also remain limited, with one of the world’s largest industrial REITs reporting free rent as a percentage of new lease value at 2.6% during the past 12 months, below that figure’s five-year average of 3.1%. However, the national vacancy rate has flatlined since spring 2022, and with owners and brokers also becoming less confident in the near-term economic outlook, signs are emerging that rent growth is decelerating. Quarterly asking rent growth averaged between 2.5% and 3.5% from mid-2021 through mid-2022. However, 2022’s third quarter rent growth tallied 2.2%, marking the first-time quarterly gains have decelerated since the start of the pandemic. Record levels of new industrial developments are expected to complete in 2023, driving a moderate increase in vacancy, and as result, CoStar’s asking rent model projects U.S. rent growth of about 9% in 2023 and 5% in 2024. Given rising interest rates and the risk they pose to the overall U.S. economy, rent gains look more likely to underperform than outperform this forecast, meaning that investors should not rule out the potential for rent growth to decelerate more quickly back toward the pre-pandemic five-year average for rent growth, which was between 5% and 6%.


The stock of U.S. industrial properties is set to grow by 4% from now through the end of 2023, marking the fastest pace of supply growth the market has seen in more than three decades. Delays securing building materials such as steel, HVAC equipment, and roofing insulation have extended overall construction timelines by about three months, or 25%, since the start of the pandemic. All of this prevented new project completions from skyrocketing during the first half of 2022. However, as supply chain bottlenecks have begun to ease, nationwide 22Q3 net completions jumped to 149 million SF (or 112 million SF for the 87 markets that make up CoStar’s National Index) from the quarterly average of 116 million SF during the first half of the year. Completions are expected to accelerate further in the months ahead. The most dramatic and sustained surge in groundbreakings since the start of the pandemic occurred during the second half of 2021 and the first half of 2022. Meanwhile, average construction timelines for large industrial projects have increased to about 13 months today. Taken together, all of this suggests that net completions will accelerate through at least mid2023. While supply growth may be reaching multi-decade highs, given the acute shortage of existing distribution space gripping the market today, it is important not to be overly alarmist about the risk posed by new development. Baring a severe shock to the U.S. economy and industrial leasing, the volume of space under construction looks set to drive a modest increase in vacancy, but not to dramatically shift the market in tenants’ favor. Across the 391 largest metropolitan areas in the U.S., there is currently about 1.2 billion SF of industrial space listed as available for lease among existing properties. Meanwhile there is now 620 million SF of unleased space currently under construction across these markets. Even in the very unlikely event that all of this space were to deliver vacant and remain unleased through late 2023, these supply additions alone would only increase the total square footage of existing available space, to about 1.8 billion SF, comparable to the amount of available space that was on the market in 2017, and about half the total square footage that was available for lease during the worst months of the global financial crisis. In the majority of major coastal markets including Southern California, South Florida, and Northern New Jersey (and even in some inland markets including Las Vegas, Lehigh Valley, and Washington, D.C.), the current pipeline of projects under construction is barely large enough to meaningfully ease the distribution space shortages that have developed during the pandemic. Oncoming new supply is more likely to push vacancies up in markets such as Dallas-FW, Phoenix, and Indianapolis, where the current tally of unleased space under construction is more than double average annual absorption rates recorded in these markets over the past five years.


Rising commercial mortgage rates have done surprisingly little to dent the strong industrial property sales tally that has accumulated so far in 2022 as ultimately, there remain far more buyers looking to build exposure to the sector than there are highly motivated sellers. But while sales volume has remained at very strong levels, transaction cap rates have essentially flat-lined at record lows over the past six months, ending the run of steep declines that occurred in 2021. There are also risks that sales will begin to slow significantly in the months ahead, if interest rates remain high, which would only widen the increasing disconnect between buyer and seller expectations that is developing as financing costs increase. Property sales by owner users and sale-leaseback deals remain an attractive option for investors looking to complete acquisitions with minimal friction. Owner-users can still realize sizable capital gains when selling properties and are less concerned about timing their sales to correspond with an optimal interest rate environment, at least when compared to private equity firms, which are solely focused on maximizing returns within their real estate portfolios. During 22Q3, institutional investment manager Oak Street Capital acquired a 460,000-SF distribution center in Roland, Oklahoma, in a sale-leaseback deal for $36 million, or $79/SF. The seller, apparel and homes goods retailer Citi Trends, agreed to lease the property back from Oak Street for 15 years, at an initial base rent of $2.7 million, or about $5.85/SF. Oak Street has reportedly offered sale-leasebacks to numerous owners in recent months, to provide long lasting tenant leases for their investors. Manhattan-based TrueStone also purchased a 1961-built, 870,000-SF distribution center in South Carolina’s Spartanburg market, as part of a sale-leaseback deal with textile maker Leigh Fibers. The sale closed for $34.8 million, or $40/SF, at a 6.9% cap rate. Another of investors’ most popular strategies in recent months has involved targeting fully leased properties with below market rents in place and lease expirations coming up during the buyer’s projected hold period. These types of investments offer buyers the opportunity to significantly boost a property’s future net operating income, without having to hold vacant, non-income producing assets as future leases can be negotiated with the existing tenant still in place. During 22Q3, Las Vegas-based GKT Group purchased a 105,000-SF property, built in 2007 in Henderson, Neveda. The property was fully occupied by plumbing supply firm Ferguson, which originally leased the property in 2010. The most recent sale closed for $35 million, or $331/SF. Though the property traded at a 3% discount to its asking price, it spent only two months on market and traded at a 3.5% cap rate as well a 45% premium to its sale price one year prior of $227/SF. Lastly, with development project completions accelerating, there remain a large number of developers looking to part with newly completed properties so that they can focus their time and capital on building as opposed to managing an existing portfolio. During 22Q3, West Hollywood-based Faring acquired a 195,000-SF distribution center, completed in Alpharetta, Georgia, and fully leased to Amazon. The sale closed for $78.4 million, or $405/SF. A few weeks earlier, Boston-based Longpoint Realty Partners acquired an unleased, 235,000-SF distribution center recently completed in Jefferson, Georgia. The sale closed for $19.9 million, or $85/SF, and the property was being marketed at a rent of $5.75/SF. Leasing the property at that rate would translate roughly to a 6.8% pro forma cap rate.


The odds of the economy falling into recession are climbing, as the Federal Reserve boosts interest rates sharply to rein in inflation that is stubbornly lingering at a decades-high rate. As a result, consumer sentiment has plunged and threatens to derail consumer spending that supports roughly two-thirds of the economy. Pandemic-related shortages of material and labor and persistent snags in supply chains have caused prices to vault higher for months. Inflation as measured by the consumer price index (CPI) accelerated to 9.1% over the year in June, its fastest pace in over four decades. The index has eased somewhat since then, slowing to 7.7% in October, mostly due to the falling price of gasoline, suggesting that peak inflation was reached in June. However, core CPI, which excludes food and energy prices, has been slower to retreat, with broad-based gains continuing across many products and services. In response to rising prices, the Federal Reserve is engaging in an aggressive tightening program, having already raised its policy rate by 375 basis points since March, including unusually large increases of 75 basis points at its last four FOMC meetings. The central bank is also shrinking its bloated balance sheet. Beginning in September, almost $100 billion of assets have been allowed to mature without reinvestment, shrinking the monetary base. Federal Reserve Chairman Jerome Powell has repeatedly stressed that the committee is focused on its price stability mandate and will push rates higher until inflation is brought down, even at the risk of triggering job losses and an economic slowdown. Rising prices and recession fears have weighed heavily on consumer sentiment and are evidently leading to demand destruction. Consumer spending was supported by stimulus payments that were sent to households during the pandemic but has been slowing since the beginning of the year. The anticipated rotation in spending away from durable goods such as automobiles and furniture to services such as restaurant meals and hotel stays has been slower than expected. Inflation adjusted spending on durable goods rose by a mere 0.1% in September, while spending on nondurable goods grew by 0.6%. Meanwhile, spending on services rose by only 0.3%, with transportation services and spending at hotels and restaurants growing the fastest. Economic momentum had already flagged in the first half of 2022, which saw two quarters of negative economic growth, often seen as the definition of a recession. However, gross domestic product popped higher by 2.6% in the third quarter, more than expected, as net exports boosted economic growth. However, with demand continuing to cool and net exports expected to decline, most analysts have downgraded their forecasts, expecting the economy to slow to a standstill in 2022 or turn negative for the year overall. But the labor market is still tight. An average of 562,000 jobs were added every month in 2021, and more than 4 million have been added so far in 2022. The unemployment rate in October was 3.7%, still close to its pre-pandemic level. Labor participation remains somewhat weak and is still below pre-pandemic levels as workers continue to cite COVID fears and a lack of childcare options as reasons to remain on the sidelines. With 10.7 million job openings recorded on the last day of September, down from an earlier high but still representing almost two job vacancies for each unemployed worker, competition for workers is driving wages higher, but inflation is eroding household incomes. Personal income grew by 0.4% in September for the third consecutive month, and the personal savings rate fell to 3.1%, as spending outpaces incomes and households dip into savings accounts. Other recent data confirm a slowdown in activity. Announcements of hiring freezes and impending layoffs are widespread, suggesting that the labor market will slow in coming days. Business investment is at risk as factories report new orders for their products are slowing. And with mortgage rates rising to levels not seen in years and housing prices still uncomfortably high, affordability has eroded, leading to a sharp turnaround in what had been a red-hot housing market. Sales of both new and existing homes have fallen in recent months as potential homebuyers are being priced out of the market.

/ Commercial Real Estate

About the Author

Lynn Drake’s status is well known in the industry: She’s the commercial realtor focused on maintaining “true north” for her corporate clients. It’s a reputation built on 35 years of commercial real estate experience. Lynn became a commercial realtor in 2001 after 15 years in corporate real estate. Thus far in her career, Lynn has successfully completed over 1,500 real estate transactions ranging from small business tenant leases to the sale and purchase of industrial complexes.