Industrial Lease Spreads Are on the Rise

With the ups and downs of various product types — those of you on the outs know who you are — there’s been some strong activity on the part of industrial, according to an analysis of Yardi data by CommercialEdge.

The demand for space has pushed up spreads between existing and new leases. Out of the 63 markets that Yardi covers, 44 have a lease spread greater than 10%; in January, 16 had spreads wider than 20%.

Those highest spreads aren’t everywhere. Mostly they exist in port markets and logistics hubs, where demand is strongest. However, some tertiary and emerging markets have also shown outsized spreads.

The high spreads means that leases close to expiration will be attractive in transactions, and expiration schedules could make the difference between a deal working out or not.

“Savvy investors are already seeking out projects with shorter lease expiration schedules and seem to be willing to pay a premium for them,” said Peter Kolaczynski, CommercialEdge senior manager. “It’s another opportunity to benefit from the historic run-up in rates as vacancy remains tight.”

Currently, in-place industrial rents averaged $7.10 per square foot in January. That’s up 6.9% year over year. During the last 12 months, leases signed averaged $9.01 per square foot nationally, $1.88 more than in-place existing leases.

“Some of the widest spreads between new leases and the market average were in Los Angeles ($7.26 more per square foot), the Inland Empire ($6.06), Orange County ($5.43), New Jersey ($3.61), Nashville ($3.35) and Miami ($3.31) — a trend that held steady over the past few quarters with little variation,” the report said.

The lowest vacancy rates were in the Inland Empire (1.6%), Columbus (1.7%), and Charlotte (2.2%).

The national average vacancy rate was up a bit — 10 basis points over December to reach 4%. That’s the second month in a row vacancies increased, probably due to large amounts of new construction coming online. In January, there was 691 million square feet of industrial space under construction.

New construction can affect vacancy, but with enough demand to keep buildings at tighter capacity, the additional space may have depressed rent rates in some areas. “For instance, in Charlotte, rents increased only by 2.8% year-over-year in January, meanwhile industrial projects underway accounted for 5.3% of existing stock — the third largest pipeline nationwide on a percentage-of-stock basis,” said the report.

Even with investors looking to put capital in properties, CommercialEdge says that transactions in industrial would likely slow in 2023.”Rising interest rates are slowing investment across all asset classes and the industrial sector is not immune,” they said. “The higher cost of capital is leading investors to reevaluate their allocations and underwriting assumptions.”