More evidence came to light in a report published Wednesday by Colliers International Group Inc. demonstrating the U.S. industrial real estate sector was able to withstand the impact of higher interest rates to deliver a strong fourth-quarter performance.
Leading the way was data showing the highest annual rental rate growth in the sector’s long history. Average asking rents rose to $8.10 per square foot in the quarter, an astonishing 18.9% year-on-year increase, Colliers said.
At the same time, Colliers (NASDAQ: CIGI) said that certain noncore markets run the risk of becoming overbuilt as cooling demand leaves new supply unoccupied or under occupied. As a result, overall industrial vacancy rates could rise as much as 150 basis points this year from a rate of 3.7% in 2022, according to the Colliers report.
“Occupancy growth is expected to decelerate as economic conditions deteriorate,” said Colliers.
Still, core markets such as land-constrained seaport areas will continue to perform well, Colliers said, and demand will stay strong from large occupiers such as third-party logistics providers, major retailers and food and beverage companies.
The most dramatic monetary policy tightening in more than 40 years during 2022 did little to slow the logistics warehouse train at year’s end, said Colliers. Occupancies totaled more than 100 million square feet in the fourth quarter, the ninth consecutive quarter that occupancies reached those levels. New supply of 138.4 million square feet broke the quarterly record that was set in the prior quarter, according to the report.
In addition, net absorption, which subtracts the amount of occupied space from the amount of vacated space, hit its highest levels of 2022 during the fourth quarter at 124.5 million square feet, despite speculation that demand would have cooled by then due to the impact of the Federal Reserve’s interest rate hikes.
For all of 2022, net absorption posted its second highest total on record at 481 million square feet, surpassed only by 2021 levels.
The strength of big box facilities was also on display in the quarter, with 175 facilities under construction that are 1 million square feet or larger, Colliers said.
Vacancy rates in key markets reached unheard-of levels in the quarter. The greater Los Angeles market, which includes the Los Angeles seaport basin and the massive Inland Empire complex about 80 miles east, reported a 0.9% vacancy rate. That was followed by Savannah, Georgia, at 1.1% and the Reno/Sparks, Nevada, area at 1.5%.
Rent growth is expected to moderate this year as supply and demand forces move more into alignment. However, demand will continue to be buttressed by companies seeking to reshore their manufacturing and distribution operations to mitigate the risk of supply chain disruptions. In addition, the automotive industry is expected to soak up large amounts of square footage as it invests heavily in new semiconductor and EV battery capacity.
Following two consecutive record-breaking years, new development starts are expected to decline in 2023, Colliers forecast. At the same time, developers that are breaking ground are incorporating new design standards. Occupiers are looking for higher clearances at 45 feet, with heavy power, abundant parking, more building and park amenities and a greater focus on meeting ESG criterion, the report said.