Industrial supply outpaced demand for the second straight quarter in Q4 2022, with overall absorption net absorption down 9.4% quarter over quarter and 15% over 2021′s year to date total, according to new research from Cushman & Wakefield.
Meanwhile, vacancy rose by 20 basis points to 3.3% in Q4 as speculative construction completions continue to chug along despite a lull in leasing activity. Approximately 143.6 million square feet of industrial space was completed in the fourth quarter after hitting a historic high in Q3; overall, completions were up 37% compared to YTD 2021, and almost 73% of those completions were speculative.
Construction starts did show signs of moderating in Q4 as the under-construction pipeline dipped below 700 million square feet. Eighty-three percent of that under-construction space is on a speculative basis while 21.3% has been pre-leased.
The under-construction pipeline fell back below 700 MSF as construction starts began to moderate due to the economic uncertainty. Of the 682.6 MSF currently being built, 83% is on a speculative basis, while just 21.3% of the product has been pre-leased by tenants.
“New leasing activity continues to moderate as tight market conditions coupled with a potential downturn pushed the quarterly total lower by 28.2% since Q3,” said Jason Price, Senior Research Director for Cushman & Wakefield. “However, the 132.1 MSF leased was more in line with pre-COVID-19 historical totals.”
A total of 756.8 million square feet as leased in Q4 year-to-date, the second highest amount ever behind 2021′s banner year. Quarterly rent growth also tempered, increasing 0.9% in the quarter after pushing up 4% in Q3.
The amount of available sublease space in the sector continues to rise and has increased by nearly 46% since the beginning of last year, according to Colliers data. Much of the available space is listed in facilities still under construction, according to the firm’s Amanda Ortiz, suggesting pre-leased space is already being given back to the market.
“With the full pipeline of projects yet to be delivered, overall vacancy will likely increase as new space and additional sublet space is added to the market in the coming year,” Ortiz says. “However, it’s important to remember that although industrial demand is decelerating, occupancy gains remain well-above pre-pandemic levels. While it may seem like a sharp drop in demand, large occupiers including major retailers, 3PL companies, and food and beverage companies will continue to expand in 2023.”
