How are key U.S. industrial markets faring?

city skyline with industrial real estate properties in the distance March 1, 2024

As industrial investors plan their long-term strategies, many are looking at assets across the supply chain, from top tier markets to regional market aligned with last mile e-commerce fulfillment to growing population centers. Here’s a look at how key industrial markets are faring as investors prepare for the next wave of industrial capital markets activity.

Erik Foster

Head of Industrial Capital Markets
[email protected]
+1 312.273.9486

How are key U.S. industrial markets faring?

As demand for industrial distribution continues to steadily increase across the U.S., regional markets such as Indianapolis and Nashville have continued to be strong logistics hubs that are well-positioned to support growing population centers. While regional markets lack the massive footprints of top tier markets, they are more efficiently scaled for regional and last mile delivery. This makes these markets ideally suited for investors, as they plan their long-term strategies for entering new markets, expanding their footprints or assembling multi-market portfolios.

As the industrial sector continues to seek equilibrium after the surge of development and tenant activity during the pandemic, many markets are experiencing a slowdown in leasing and construction, causing vacancy rates to rise. Here’s how some key markets are faring during this transition.

The Chicago market, with 1.41 million square feet (msf) of industrial space, has continued to be ranked first in CoStar’s list as the largest industrial market by inventory in the US. It can be an important barometer for industrial activity throughout the country. At the end of 2023, the Chicago market observed a modest rise in vacancy to 5.3% and an 11.9% annual rise in rental rates, with the average reaching $7.90 psf. This boost follows remarkable growth since 2018, when rents were just above $5 psf.

Chicago’s leasing activity declined by 38% year-over-year in 2023, reaching 41 msf and mirroring a trend seen in many markets. Net absorption for the year was 17 msf, which aligns with the yearly average of 19 msf see from 2016 to 2020, according to Avison Young research.

Investment sales in Chicago totaled $3.34 billion across 942 properties over the past 12 months, the lowest level in a decade. The average cap rate was 7.9% and average pricing was $91 psf. Chicago was right behind New York ($3.83 billion), the Inland Empire ($4.2 billion) and Los Angeles ($4.6 billion), the top market. Averaging pricing for those markets was $262 psf, $267 psf and $318 psf, respectively.

Tracking Indianapolis’ burgeoning distribution market

Indianapolis, with its central US location, has become a critical industrial market as it offers connectivity to five interstates that can access nearly half of the country’s population within one day’s drive.  Plus, it provides access to qualified labor at lower costs that other major markets and more reasonable real estate costs.

Indianapolis recently benefitted from inward migration during the pandemic which boosted the population from 1.23 million people in 2020 to 1.88 million in 2023. In comparison, Chicago’s population increased by 8.87 million in 2021 to nearly 9 million in 2023, despite a decline of 264,000 in the overall Illinois population during the pandemic due to a number of factors.

Indianapolis has experienced continuous industrial growth over the past decade, but a 67% leasing decline in 2023 and the addition of 40.5 msf of industrial space over the past two years pushed the vacancy rate up to 8.8%. The supply-demand imbalance is expected to improve in the near term, as construction activity decreased by 64% throughout 2023, leaving just 8 msf in the pipeline.

Midwest investment sales remain slow

CoStar research shows Indianapolis with $731 million in industrial sales over the past 12 months, slightly behind Nashville, with $742 million. Nashville had an average cap rate of 6.7% and average sales price of $106 psf, more favorable than the recent jump to 8.4% cap rate and $73 psf sales price for Indianapolis.

Nashville industrial activity remains steady, with net absorption totaling 4.9 msf at the end of 2023, slowing from the record absorption recorded in the last two years. Demand remains strong, however, with robust leasing activity of 10.2 msf in 2023, above the 8.5 msf average from 2007 to 2018. A flight to quality in this market despite the higher cost has kept vacancy within a healthy rage of 4.3% despite a recent construction boom.  A number of factors such as low state taxation, strong inward migration and more favorable business climate than many cities across the country will continue to put positive demands on industrial real estate in favor of owners, and investors.

The Columbus market, which has experienced rapid population and economic growth over the past decade, recorded a higher industrial sales volume ($995 million) than Nashville and Indianapolis and a lower cap rate (7.5%) than Indianapolis. Average pricing was $76 psf, similar to Indianapolis, but notably lower than Nashville ($106 psf). Columbus recorded nearly 5 msf of net absorption over the past 12 months and its vacancy rate increased to 7.7%, as 18.7 msf of new construction delivered. Rent growth has remained strong, rising annually by 9.6% to reach $7.95 psf.

robots manufacturing a car

Detroit shows resilience amid headwinds

Many Midwest markets distribute goods to Canada by way of Detroit, a critical market for cross border freight and connectivity to the region’s major airports and railroads. As the long-term home of the Big Three automakers, Detroit is a key market for moving automotive parts and finished products, among other goods, throughout North America.

Detroit experienced a slight slowdown in industrial activity in 2023 compared to its peak in 2021 and 2022, but occupier demand held firm. The average amount of space leased annually across the pre-boom period of 2016 to 2020 was 14.2 MSF. In 2023, leasing activity totaled 12.5 msf, down over 38% from the prior year, but close to the pre-boom period. 

The vacancy rate continued to decrease in the fourth quarter, dropping 50 basis points to 3.6%, notably lower than Atlanta (7.0%), Houston (7.3%), Denver (7,4%) and Dallas (9.9%), according to Avison Young research. 

The market has shown notable resilience given recent economic headwinds and the impact of the 2023 United Auto Workers strike that caused considerable disruption and an estimated $10 billion in lost productivity and added labor costs for the auto industry. And, while the auto industry’s shift toward electric vehicles has positively impacted industrial space usage in Detroit, the slowing demand on the consumer side could prompt some occupiers to scale back space. 

Similar market shifts impact East Coast

A look at industrial markets along the East Coast shows Northern New Jersey with 22.5 msf of leasing activity in 2023, lower than in recent years but still above average compared with 2012 through 2015 and 2019. Investment sales was $17 billion in 2023, the lowest amount since 2017. Rents increased annually by 3.54% to reach $16.37 psf in 2023 and are expected to level off in the first half of 2024 as deliveries outpace demand, according to Avison Young research.

Nearby Philadelphia, which offers an often less expensive alternative to some businesses than the prime markets of Northern New Jersey and New York, recorded average industrial rents of $11.12 at the end of 2023, versus $19.61 in New York and $15.78 in Northern New Jersey. Philadelphia recorded $1.5 billion in industrial sales over the last 12 months, with an average price per square foot of $115 psf. Industrial cap rates averaged 7.3%, according to CoStar.

As industrial markets across the country recalibrate, investors are watching for signs of resilience that will bode well for the long-term. Markets that can continue to generate strong demand, keep vacancies low and work through large construction levels are likely to emerge on solid footing during the next phase of capital markets activity.

Source: Avison Young Research, CoStar

thumbnail image of REIT and economic indicators for 2024-02-26