Despite Headwinds Industrial Demand Remains Strong

A new report from Savills on the US industrial market for the second quarter of 2022 says that demand is still strong, but that has a lot to do with the market and some quirks about the general economic environment. It’s another puzzle piece that fits in with observations from other sources.

As Savills notes, there are major macroeconomic concerns. The country may be headed into a recession. GDP growth is down, and inflation is high, with a tight labor market and ongoing supply chain issues contributing. The Federal Reserve has been boosting its benchmark interest rate and that, as it was supposed to, has pushed up other interest rates as a result. Higher interest means a foot on the economic brake pedal from more expensive financing.

Commercial real estate has already felt the impact and likely will even more if the Fed, as expected, adds another 75 basis points to its rates on Wednesday. 

And yet, as Savills notes, “The data is not yet indicating any measurable pullback with year-to-date net absorption ahead of the first half of 2021.” Industrial vacancies are at an all-time low of 3.9%, and sublease space is averaging only 0.3%, “exceptionally low.” Blackstone has said much the same as it expects record-low industrial vacancies.

About 818 million square feet of new industrial is under construction, according to Savills, but that is slow going. The firm points to supply chain issues, but as others in the industry have noted, also having an effect are higher financing costs—developers have to decide whether they can afford to move ahead—and labor shortages. Even if you have the money and the materials, someone has to put everything together, and those who can are in high demand.

Now add the industrial land crisis, as CommercialEdge put it. “In June, the average in-place rents grew 4.9% year-over-year, the vacancy rate fell to 4.6% and the average cost of a new lease signed in the last 12 months was 88 cents higher per foot than the overall average,” the firm wrote. “Supply of new industrial space cannot maintain pace with demand, a problem more pronounced in areas where geography limits the amount of land available for development. Port markets, and Southern California in particular, are most attuned to this issue.”

Rent growth is expected to moderate, says Savills, which is good for tenants as the one-year asking rent increase in the U.S. was 11% last quarter. Hot markets of Los Angeles and the Inland Empire were over 51% each. Northern New Jersey hit 46.6%. More “moderate” but still in-demand areas like Houston, South Florida, Baltimore, and Columbus ranged from nearly 18% to over 19%.

But, still, landlords continue to hold the pricing advantage so long as demand is high and supply, low.