Posted on November 29, 2022 · Posted in Industrial / Flex, Investments, Retail

Fundamentals for the US industrial market have remained solid in 2022, but couldn’t keep up with last year’s record pace. But the sector is not recession-proof, according to one top analyst – and deal flow is likely to slump in 2023 as occupiers recalibrate.

James Breeze, Senior Director, Global Head of Industrial & Logistics Research at CBRE, sat down with GlobeSt in advance of his upcoming keynote address at our industrial conference on December 8 in Scottsdale, Ariz., to talk about the trends he’s seeing within the in sector.

He noted that leasing activity for industrial looks to finish the year  at approximately 850 million sq. ft., the sector’s second-highest year on record. And despite a pullback in transaction volume, rent growth accelerated to a year-over-year growth rate of 18.9%, an all-time record, while vacancy rates hit a record low 2.9% at the end of the third quarter.  But the frenzy can’t last forever – particularly in the wake of gloomy economic news and forecasts.

“The industrial market is not recession proof and transaction volume will further decline in 2023 as occupiers susceptible to an economic slowdown pause expansion and the post-COVID rush to hold additional inventory dissipates,” Breeze tells GlobeSt.com. But “despite the slowdown, there remains demand drivers that provide insulation including consumer expectations for quicker delivery and fully stocked shelves, continued supply chain transformations and modernization, and location optimization which includes finding markets with enough labor. These drivers will keep net absorption positive for the 13th consecutive year, vacancy rates near all-time lows, and rental rate growth over 10%.”

 Light Industrial Pauses, While 3PL Booms

So-called “light industrial” spaces – those under 100,000 square feet” – are pumping the brakes on expansion plans, and Breeze says he continues that trend to continue into 2023 as the companies that occupy such space are typically small businesses more susceptible to an economic downtown.  However, he says CBRE continues to see strong demand for larger facilities, especially those over 700,000 square feet, as large companies continue expanding.

“But the big story from a demand perspective is the continued growth of the 3PL sector,” Breeze says. “Companies continue to outsource its distribution because of economic uncertainty, but also rising costs, under supply of space and difficulty in finding labor.”

CBRE research shows that 3PL lease market share was 34% at the end of Q3 and Breeze expects it to reach 40% but mid-year 2023.

 Headwinds Persist As Recession Looms 

 “Economic uncertainty is definitely the top concern,” Breeze says. “While we expect a small slowdown in retail sales in 2023, if the reduction is robust there could be further pullback in activity. There are also other headwinds including the war in Ukraine, local municipality pushback on industrial development, interest rate hikes, and labor shortages that provide some headwinds.”

Heading into 2023, Breeze says he’ll be keeping a close eye on what interest rate hikes and the projected recession will do to retail sales the first half of the year.  He’s also watching whether there will there be a significant decrease in groundbreakings of new distribution facilities, which could lead to an under supply of industrial space in 2024, as well as how high rents will ascend.

“There will be a slowdown in demand but vacancies will remain low,” Breeze predicts. “It will be interesting to see if landlords continue to push rents up at its current levels or slow down growth.”

 

Source: GlobeSt.

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