Boom Boom Days Of Industrial Real Estate Development Wane

The industrial real estate boom of the last few years isn’t over, but it’s slowing to a more moderate pace as companies like Amazon.com Inc. reduce estimates of space requirements and cut back on new projects.

New construction of industrial space totals 636.6 million square feet nationally, down from the 667.5 million square feet a month ago and 742.3 million square feet at the beginning of the year.

“The waning pipeline is likely a sign of things to come,” the Yardi Matrix report states. 

Meanwhile, 127 million square feet of industrial space was delivered in the first quarter. If deliveries continue at that pace, it would blow last year’s record 489 million square feet of deliveries out of the water.

That said, Yardi Matrix expects completions to slow for the rest of the year as commercial banks tighten lending standards for construction loans and financing is less available than in recent years

The biggest challenge for the industry is rising interest rates and their impact on pricing and the ability to refinance loans that originated when mortgages were lower. With the higher rates and banks’ stricter underwriting standards, many properties refinanced today might qualify for up to 25% less in proceeds than they did at origination.

Loans on industrial properties that account for nearly 14% of space nationally will mature between now and the end of 2025, according to Yardi Matrix.

National average rents for industrial properties were $7.15 per square foot in March, up 7.1% year over year. During the first quarter, national average rents increased by 14 cents or 2%. 

Large coastal markets had the highest rent growth, with the Inland Empire increasing 16.3% year over year; Los Angeles up 13.1%; Boston rising 9.7%, New Jersey up 8.6%; Bridgeport, Connecticut increasing 8.3%; and Orange County, California up 7.6%.

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Of the top 30 metro areas, 18 recorded year-over-year growth of 5.2%. St. Louis was the only metro to experience negative growth.

The national vacancy rate was 3.9% in March, unchanged from the previous month. 

The lowest vacancy rates are mainly in the Midwest and West. Columbus, Ohio, reported a 1.2% vacancy rate; the Inland Empire came in at 1.7%; Phoenix, 2%; Los Angeles, 2.3% and Indianapolis 2.4%.

Leases signed in the last 12 months had an average rate of $9.24 per square foot, up 15 cents from the previous month and $2.09 more than the average for all leases.

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