Core Industrial Markets Poised For Strong 2023

Core industrial markets will continue to perform well in 2023 despite a weakening economy, but construction levels in some metros pose a threat of overbuilding in those regions.

Supply at the end of 2022 hit a new record, according to a fourth-quarter analysis from Colliers, rising 25.9% year over year, and the pipeline remains robust despite many developers hitting pause on new starts. A total of 466.9 million square feet was completed at the end of the year, with 647.3 million square feet under construction at the close of the fourth quarter. Colliers also points to evidence of the growing reshoring movement, noting that nearly 100 manufacturing facilities larger than 100,000 square feet were under construction at year-end, for a total of more than 40 million square feet.

“The reshoring of manufacturing continues to be popularized in the US,” the report states. “More manufacturing facilities are breaking ground in the U.S after global events revealed more risks on the supply chain. Reshoring is generally costly; however, it may be the best cost option for some to ensure supply chain resiliency.”

Eight markets posted occupancy gains of more than five million square feet in Q4, including Dallas, Chicago, Salt Lake City, Atlanta, the Inland Empire, and Phoenix, while nine had negative absorption (including Birmingham, North Shenandoah Valley, Stockton, and Huntsville). Emerging markets like Savannah, Charleston, Salt Lake City and Reno/Sparks are experiencing the most growth in absorption as a percentage of inventory, with Savannah ranking as the top growth market in the US per Colliers’ rankings.

“The robust activity experienced in 2022 highlights the pent-up demand that has existed since the start of the global pandemic,” the report notes. “While some occupiers may hold off on making major real estate moves in 2023, others may see potential opportunities for expansion as new supply is delivered.”

There are some challenges ahead, according to the Colliers analysis: occupancy is expected to dip this year, though large occupiers like major retail brands and 3PL companies are expected to expand over the course of the year. The industrial vacancy rate is also expected to rise in 2023, potentially by between 120 to 150 basis points.

“As the economy weakens and robust levels of new supply are delivered, the U.S. industrial market will face some challenges in the coming quarters,” the report states. “The outlook for 2023 is optimistic, although industrial activity is expected to ease as economic conditions persist.”

The Colliers report also notes that developers that are proceeding with new starts are incorporating new design standards, as many occupiers are now looking for 45-feet clear facilities with heavy power, lots of parking, and more building and park amenities.