Once A Bright Light In The CRE Sector, Industrial Properties Are Now Also Dealing With Rising Vacancy Rates And Interest Rate Woes

After a stellar 2022, the commercial real estate (CRE) industry belle of the ball is finding 2023 to be a lot more challenging. Industrial property owners and investors, who snatched much investor momentum last year while office space vacancies skyrocketed, are returning to earth. Because of stresses in the nation’s economy, some are literally stuck at ground level. 

According to CoStar Analytics, the U.S. industrial market vacancy rate at the end of the first quarter of 2023 rose to 4.3% because net absorption, the change in the amount of space occupied, declined to 55 million square feet — half as strong as first-quarter absorption last year.

“I think that 2023 and early 2024 will present more challenges for industrial properties than most people are acknowledging, CoStar Director of U.S. Industrial Analytics Adrian Ponsen told Benzinga. “There is a record amount of supply, and at the same time, the interest rate increases that started last year are weighing on the overall economy. It’s all but certain that vacancy rates are going to keep rising this year.” 

One example of a rapidly shifting industrial sector is Dallas, where an Avison Young survey reported vacancies in the metro area are close to historic lows. Still, newer buildings that went online in 2022 are “roughly 33% vacant.” 

Another issue is that, like what is happening in the multifamily housing market, new starts have ground to a halt. CoStar reported that the U.S. industrial vacancy rate remains tighter than at any point recorded during the 2010s. The first-quarter 2023 increase in vacant industrial space is the highest since 2009 and is driven “almost entirely by completions of unleased industrial projects within the record wave of new industrial developments that will continue bringing a large number of new projects to completion through the remainder of 2023.”

Ponsen also pointed to those projects that ground to a halt because of a lack of funding, which he believes is a positive development. 

“There are a lot of developers who purchased land and haven’t been able to break ground and pour concrete because of financing issues. The fact that people are pulling back on development makes me more bullish because it means there will be a lot less vacant space 12 months from now,” he said. “We have to first get over the hump of projects that started in 2022.”

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