2023 Q1 U.S. industrial market overview

U.S. Industrial market trends exhibited continued strength despite economic headwinds, as pre-leasing activity drops slightly from all-time highs. Demand remains robust as net absorption in Q1 ranked #4 of first quarters since 2016. Vacancies remain near historic lows but are trending upward as new deliveries peaked in Q4 2023. Deliveries have already topped out in Q4 2022, just as monetary tightening is creating new space disruption that will hit the market beginning Q4 of 2023 as construction pipeline ground-breakings peak in Q3 2022. Delivery gaps typically are experienced within 12-18 months of economic events, with gaps in new space deliveries typically creating very competitive environments for occupiers as very little options will be available. Capital Markets activity continues to be extremely reserved compared to the past 5 years, as investment activity suffers from uncertainty in underwriting due to Federal Reserve opaque policy guidance. 

Highest Q1 net absorption among Q1s since 2006

Despite economic and financial headwinds experienced throughout the world to start 2023, industrial net absorption continues to show its resiliency. With new deliveries hitting historic levels in 2022, new spaces continue to be leased in a sign that demand has kept speculative space supply additions in balance.

Q1 2023 ground-breakings relative to Q3 2022 peak

Upward pressure on direct and sublet vacancies and a record number of new deliveries in 2022 caused the industrial development pipeline to decline to the lowest level reported since Q4 2021. New construction ground-breakings topped out in the third quarter of 2022, with new ground breakings in Q1 2023 representing just 10.0% of under construction space. We are closely monitoring the affect decreasing ground-breakings will have on new space deliveries 12-18 months out, as tenants looking for newly constructed space may have limited optionality relative to prior years.

Industrial cap rate widening since Q2 2022

Aggressive Federal Reserve policy and the surge in 10-year Treasury yields has narrowed industrial cap rate spreads over risk-free rates. Rather than seeing many transactions hit the market at decreased prices, owners who considered selling have simply pulled opportunities from the market until the capital markets environment stabilizes. Limited transactional activity is expected until more guidance is given by Monetary Policy leaders that rate increases are plateauing. A focus on growing cash flows for assets should supplant appreciating values in the sector for the near and mid-term.
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