Industrial Real Estate Keeps the Pace…for Now

Industrial Real Estate Keeps the Pace…for Now

U.S. industrial leasing activity will decline in 2023, but demand will keep pace with supply for the 13th consecutive year of positive net absorption, predicts CBRE in its U.S. Real Estate Market Outlook 2023 report. Vacancy rates that remain below the 10-year average, however, will lead to double-digit rent growth, finds the report.

As of Q3 2022, a record 661 million square feet of industrial space was under construction—nearly double the amount since 2020. Many of these projects will be completed in 2023 and increase the U.S. industrial vacancy rate by 30 to 60 basis points.

E-commerce growth, supply chain transformation, and location optimization will continue to drive demand for industrial space in 2023. Construction financing challenges and economic uncertainty, however, may lead developers to take a wait-and-see approach to future construction.

CBRE expects groundbreakings to decline by more than 50% in early 2023. The reduction in construction starts will drop completions to around 250 million square feet in 2024, leading to a shortage of first-generation space.

In 2023, third-party logistics providers will drive leasing demand. As many companies increase outsourcing, 3PLs’ leasing market share will reach 40% by midyear 2023, even though overall leasing activity is expected to decline by 10% to 15%. This activity will keep vacancy rates low and create rental rate growth of approximately 15%.

Markets with an excess of construction deliveries, however, may have to compete by offering increased concessions, such as free rent and higher tenant improvement allowances.