From Boom To Balance: Industrial Real Estate Cools In 2023, Anticipates Stabilization In 2024

After surging in the wake of the pandemic, the industrial real estate sector experienced a significant cooldown in 2023, and this year is poised to be a period of stabilization and normalization for the industry.

Rental rate growth is expected to slow as vacancy rates rise as record levels of new supply work their way through the market, according to CommercialEdge's National Industrial Report.

"If 2023's word of the year was ‘normalization,' we are labeling 2024's motto as stabilization," CommercialEdge Director Peter Kolaczynski said. "Stabilizing rent growth and deliveries, with enough positive economic undercurrents to have long-term projections remain optimistic but at a more sustainable level."

The pace of new supply entering the market is expected to decrease this year. The peak in deliveries occurred in 2023, marked by a historic surge in starts that tapered off when interest rates began to rise in the latter half of 2022. Despite the slowdown in new development, long-term demand indicators for industrial assets remain optimistic.

Construction spending on new manufacturing facilities has nearly tripled in the last two years, according to the U.S. Census Bureau. Computer chip and electric vehicle manufacturing account for much of the spending. The construction will take years to complete, but when the new plants are delivered they will fuel demand for ancillary companies along supplier and logistics networks.

Industrial projects are still breaking ground, although at a slower pace. Nationwide, 462.9 million square feet of industrial space was under construction in December, accounting for 2.4% of existing stock. Since hitting a high of 742.3 million square feet in December 2022, the new-supply pipeline has shrunk every month as projects deliver and new projects break ground at a slower rate.

High interest rates are slowing transaction activity. At $52.1 billion, sales of industrial properties last year were about half of what they were in 2022. Although volume is down, sale prices saw a 4.7% year-over-year increase. The average sale price is $129 per square foot.

Western industrial markets saw sale prices above the national average. Average sales prices in the Bay Area were $334 per square foot, followed by Los Angeles at $314 per square foot, Orange County at $296 per square foot and the Inland Empire at $248 per square foot.

Los Angeles and the Inland Empire recorded the most industrial sales last year, with investors closing $3.96 billion and $3.89 billion in industrial deals, respectively.

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