Last year the industrial asset class knocked it out of the park in terms of performance. Industry watchers hoping for a repeat will be disappointed, James Breeze, CBRE’s senior director and global head of Industrial & Logistics Research told the audience at the GlobeSt.com INDUSTRIAL real estate event held this week in Scottsdale, AZ. “They just won’t happen again.” For instance, leasing activity is down 10% this year compared to 2021, he said. And there has been a noticeable decline in light industrial space leasing by smaller businesses that have been affected by the economic uncertainty.
But that doesn’t mean the asset class isn’t well situated not only for the mild recession that Breeze and many other economists are expecting in 2023 but also for longer-term trends as well. And even if the halcyon days of 2021 are in the rearview mirror, the sector is still posting very strong activity, Breeze said.
Leasing activity may be down 10% this year, but it is still up 36% compared to 2020. “We’ll probably finish this year at 850 million square feet of leasing activity,” Breeze said. Also, the average rent growth is close to 19% “and that is a record.”
Next year fundamentals bode well. There are many markets in the US that are considered undersupplied and there is not much fear of industrial being hit with an oversupply, Breeze said. Right now, the current development pipeline is 28.6% pre-leased and 73% of everything that has been built this year is already off market. Meanwhile, there are plenty of industrial assets that need replacement or updating. Breeze pointed out that the average age of a building in the Inland Empire is 25 years old. A lot of the US inventory is becoming obsolete. We need much more development.”
All in all, “it is a good place going into a recession,” he said.
Some of the demand drivers for the space include e-commerce sales, which did drop off after the pandemic receded into the background but still can’t be counted out as a significant factor in the industrial market. Breeze said that e-commerce sales are projected to reach 32% of all sales by 2032.
A desire by companies to trim their transportation costs is another factor behind industrial’s growth. Between 45% to 70% of a company’s supply chain costs are transportation costs. Tenants are also eager to keep a 30-day inventory on hand now that the supply chains have evened out.
Finally, there is this: 64% of occupiers expect to grow in the next three years, Breeze said. Apparently, they are sanguine about the upcoming recession, which is exactly the attitude you want in a tenant.