Economic Uncertainty Causing 3PL Logistics Demand to Fall

CBRE sees economic uncertainty weighing on demand from third-party logistics companies (3PLs), causing the firm to drop its market share forecast for that segment.

CBRE’s initial forecast was for 3PL market share to reach close to 40% in 2023 but it now suggests that it will decline as food & beverage and auto-related users expand.

Additionally, the firm sees less demand for new industrial construction, causing vacancy rates to tick up more than it initially expected. CBRE said the 3.7% vacancy rate at the end of Q2 could hit 4.5% by year’s end.

New supply exceeded 100 million square feet for the fifth consecutive quarter in Q2.

“However, oversupply will be confined to larger facilities, which will gradually be absorbed over the course of 2024 as new construction levels decline,” CBRE said in its 2023 US Real Estate Market Outlook Midyear Report.

Renewing Pre-Pandemic Leases

Adrian Ponsen, director of U.S. industrial analytics at CoStar Group, tells GlobeSt.com that industrial leasing is now essentially back to 2019 levels and could decline further in 2024 if higher interest rates continue to weigh on retailers’ sales forecasts.

Meanwhile, there is still about 500 million square feet of unleased industrial space under construction across the US, which is becoming more direct competition for existing owners as it nears completion.

“As supply and demand swing more in tenants’ favor, we are seeing signs that growth in the market rent for new leases is slowing, and even flat lining in some of the priciest port markets that achieved the biggest gains during the pandemic.

“But most tenants have leases that were signed more than three years ago, before the pandemic-driven surge in industrial rents. This means that in 2024, industrial landlords will continue to benefit from very strong net operating income growth as these leases expire and reset from their pre-pandemic to post-pandemic rates.”

CBRE said leasing activity for blocks of 30,000 square feet or more fell by 29% as Fortune 500 companies put expansion plans on hold until there is greater economic clarity. 

Leasing activity for blocks of 300,000 square feet or more has seen the greatest slowdown, leading to higher vacancy rates. However, CBRE said that leasing activity could reach 750 million square feet by year-end due to a spike in activity from large users, which could result in stronger demand for larger spaces in Q4.

Meanwhile, leasing for smaller industrial facilities has been strong with units of 25,000 square feet to 100,000 square feet slightly lagging last year’s pace, while those for units less than 25,000 square feet are up year-over-year.

Brett Turner, Senior Managing Director, Acquisitions and Dispositions, BKM Capital Partners, tells GlobeSt.com that he is seeing strength in the small and mid-bay space. 

“With a lack of new supply, rents have moved substantially and vacancy in the smaller size segment continues to decline,” Turner said.

“Demand will remain strong for smaller properties—particularly well-located assets with the modern finishes and features that are sought after by today’s sophisticated tenants. Despite the current challenges posed by macroeconomic headwinds, our portfolio is now seeing higher leasing spreads, lower credit loss, and more activity than at any point in the cycle.”

2023 Rent Growth Could Hit 15%

CBRE said higher-than-expected rent growth in emerging markets could push annual industrial & logistics rent growth to just under 15% by year-end, a slight uptick from its forecast in January of 12% to 15% percent.

It added that rent growth has shifted from the gateway markets of LA and Northern NJ to markets with strong population growth such as South Florida, Atlanta, and Las Vegas.

Julian Freeman, partner, Cox, Castle & Nicholson, tells GlobeSt.com that demand for industrial space is generally normalizing this year. 

“Leasing activity has decreased since it peaked during the pandemic and deals are taking longer to complete,” he said.

“Landlords are returning to pre-pandemic underwriting, building longer lease times and more free rent into their assumptions.”

He said a few continuing concerns across the country for owners are massive delays in providing or upgrading electrical power capacity (e.g., obtaining switchgear), expensive and cautious debt markets, and moratoriums on additional warehouse development.

“On the positive side, vacancy is still very low, it’s expensive for tenants to move, and occupiers that desire new space are still willing to pay the current high rental rates.”

Status Check on the Inland Empire

Jared Riemer, principal at Trammell Crow Co., said leasing activity has been slow in the Inland Empire with Q2 being the first quarter of negative net absorption in more than 13 years.

“That negative net absorption, paired with a historically high construction pipeline, is putting upward pressure on vacancy,” Riemer said.

“As a result, we’ve started to see rents decline off their recent peaks, especially for smaller buildings, which are in greater supply. 

“However, construction starts have slowed significantly over the past year, which will help keep the market from getting significantly oversupplied. In the long term, the ongoing challenges for development will continue to limit supply. Continued strong demand will support long-term rent growth, making the Inland Empire a desirable market for investment. 

Growing Levels of Subleasing Space

Doug Ressler Manager of Business Intelligence, CommercialEdge, tells GlobeSt.com that the Federal Reserve’s fight against inflation has led to multiple interest rate hikes over the last 18 months. 

“As capital has become more expensive and scarcer, industrial construction starts and sales have slowed, but rent growth remains strong and vacancies tight,” Ressler said.

“Leasing activity has slowed this year, due to tenants likewise having to deal with the converging forces of higher rates, economic uncertainty, and normalizing e-commerce demand. 

“Additionally, there have been reports of a growing amount of sublease space available as tenants look for ways to increase cash flow and streamline supply chains.”

Nevertheless, in-place rent growth remains strong— with the national rate increasing 7.5% over the last 12 months—and vacancy rates have remained low, slowly ticking up despite historic levels of new supply coming to market, he said.

“Even within a tight interest rate environment, industrial is performing better than other asset classes, and long-term demand drivers remain positive. The reshoring and nearshoring of manufacturing continues to pick up steam, and although e-commerce cooled in the quarters coming out of the pandemic, the gains that were made have become entrenched.”