​CBRE Forecasts a 50% Cut in Industrial Big Box Groundbreakings

Industrial big box construction has performed well lately, but CBRE expects lease transaction volume to dip significantly this year, falling by 50%.

The post-peak pandemic leasing rush is waning, according to CBRE, and some tenants are waiting for more macroeconomic certainty.

A record level of product is under construction — a record 455 million sq. ft. is under construction, with 25.3% pre-leased — however highly constrained construction financing will reduce groundbreakings going forward.

On the positive, lower leasing activity at a time of high development completions will result in some vacancy increases, but double-digit rent growth will remain.

CBRE defines an industrial big-box facility as a traditional warehouse or distribution center of at least 200,000 sq. ft.

Direct Vacancy Rate 3.3% at Year End, Matching 2021’s Record Low

Record-low vacancy, unprecedented rent growth, and significant new construction headlined 2022, according to CBRE’s report.

Serving growing populations, modernizing space for automation, and increasing supply chain resilience largely drove occupier demand.

The direct vacancy rate was 3.3% at year-end, matching 2021’s record low, driving up first-year base rents by 23% year-over-year.

Third-party logistics (3PL) providers were the most active occupiers for the first time, accounting for 41% of all lease transactions. There, vacancy and rental rates hit record levels, but transaction volumes declined from 2021.

The Fed Applying Brakes, Getting Traction

Matthew Rotolante, CCIM, SIOR, MBA, president, Lee & Associates, Miami, tells GlobeSt.com that the Fed’s goal of raising interest rates to put the brakes on runaway rates of inflation is beginning to get traction.

“Double-digit increases in rents that had sustained an unprecedented expansion and delivery of new inventory are beginning to soften,” he said.

“Yet construction costs are hovering close to the same for critical components such as concrete and steel and labor. And with industrial land prices also buoyed by newly minted outdoor storage funds and user activity, the natural result is a reduction in the viability of development pro​ ​forma​s​ for big box distribution centers.”

There’s Two Narratives: Both Are Right

Brett Forman, managing partner of Palm Beach, Florida-based Forman Capital, a provider of commercial real estate debt and equity solutions, tells GlobeSt.com that he sees two narratives on big-box industrial.

“Overcapacity and demand will drop with a recession, and therefore prices, too,” Forman said. “Still, there is a strong market for industrial and great demand so pricing should hold up well.

“Big-box industrial is very much sub-market driven, and both are right. Obviously, the debt markets are tighter, and spreads are higher for this product class, so as such, pricing must be softer than it was 12 to 18 months ago. Without a question, it is a strong asset class.”

Strong Demand for Smaller Light Industrial

Tim Bishop, CEO of Iconic Equities, which has a $400 million industrial-focused partnership with alternative investment firm Leste Group, tells GlobeSt.com that the outlook for different segments of industrial is quite divergent now.

“We continue to be active with smaller light industrial properties,” Bishop said. “This is where demand is still strong, and we have more visibility of the drivers for continued growth.

“On the other hand, large-scale industrial product, especially over 1 million square feet, could take a real hit if the economy softens. For that reason, we’re on the sidelines for big-box industrial.”

Occupancy Rates, Rent Growth Will Re-Accelerate by 2024-25

Adrian Ponsen, national director of US industrial analytics at CoStar Group, tells GlobeSt.com that a record tally of distribution center development is completing at a time when tenants are cautious regarding the economic outlook and have begun to pause the build-up in inventories that carried from fall 2021 through fall 2022.

“However, most industrial property owners will be insulated from these near-term pressures unless they have a large share of lease expirations coming due,” Ponsen said.

“Meanwhile, there is clear cause for optimism that growth in big box industrial occupancy rates and rent growth will begin to re-accelerate by 2024-25. The recent pullback in construction starts means that there will be far fewer new distribution centers completed during those years.

“So, growth in the stock of industrial properties will begin slowing at the very same time that the bulk of U.S. semiconductor and electric vehicle plants catalyzed by recent federal legislation will be starting production and generating millions of square feet in demand for industrial space from their suppliers.”

South Florida Remains a Hot Spot

Dalton Easton, associate with Miami-based Easton Group, tells GlobeSt.com that demand for industrial product varies from sub-market to sub-market.

In South Florida, for example, Easton said, it has historically always been a high-barrier-to-entry market, and now with the current capital markets conditions it only makes it harder to acquire and build new product.

“With vacancy rates still hovering around historic lows, and now with the added difficulty to finance new construction, it should further perpetuate rent growth,” Easton said.

“South Florida is still seeing a lot of pre-leasing activity on new construction despite the headwinds other markets are facing.”