Forecasting a 50% Cut in Industrial Big Box Construction Groundbreakings
Forecasting a 50% Cut in Industrial Big Box Construction Groundbreakings
Too many financial headwinds for the Industrial sector to continue its strong performance.
Industrial big box construction has performed well lately, but CBRE expects lease transaction volume to dip significantly this year, falling by 50%.
The post-peak pandemic leasing rush is waning, according to CBRE, and some tenants are waiting for more macroeconomic certainty.
A record level of product is under construction — a record 455 million sq. ft. is under construction, with 25.3% pre-leased — however highly constrained construction financing will reduce groundbreakings going forward.
On the positive, lower leasing activity at a time of high development completions will result in some vacancy increases, but double-digit rent growth will remain.
Industrial big-box facilities are a traditional warehouse or distribution center of at least 200,000 sq. ft.
Direct Vacancy Rate 3.3% at Year End, Matching 2021’s Record Low
Record-low vacancy, unprecedented rent growth, and significant new construction headlined 2022.
Serving growing populations, modernizing space for automation, and increasing supply chain resilience largely drove occupier demand.
The direct vacancy rate was 3.3% at year-end, matching 2021’s record low, driving up first-year base rents by 23% year-over-year.
Third-party logistics (3PL) providers were the most active occupiers for the first time, accounting for 41% of all lease transactions. There, vacancy and rental rates hit record levels, but transaction volumes declined from 2021.
The Fed Applying Brakes, Getting Traction
Matthew Rotolante, CCIM, SIOR, MBA, president, Lee & Associates, Miami, tells GlobeSt.com that the Fed’s goal of raising interest rates to put the brakes on runaway rates of inflation is beginning to get traction.
“Double-digit increases in rents that had sustained an unprecedented expansion and delivery of new inventory are beginning to soften,” he said.
“Yet construction costs are hovering close to the same for critical components such as concrete and steel and labor. And with industrial land prices also buoyed by newly minted outdoor storage funds and user activity, the natural result is a reduction in the viability of development pro formas for big box distribution centers.”
There’s Two Narratives: Both Are Right
Brett Forman, managing partner of Palm Beach, Florida-based Forman Capital, a provider of commercial real estate debt and equity solutions, tells GlobeSt.com that he sees two narratives on big-box industrial.
“Overcapacity and demand will drop with a recession, and therefore prices, too,” Forman said. “Still, there is a strong market for industrial and great demand so pricing should hold up well.
“Big-box industrial is very much sub-market driven, and both are right. Obviously, the debt markets are tighter, and spreads are higher for this product class, so as such, pricing must be softer than it was 12 to 18 months ago. Without a question, it is a strong asset class.”
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South Florida Remains a Hot Spot
Dalton Easton, associate with Miami-based Easton Group, tells GlobeSt.com that demand for industrial product varies from sub-market to sub-market.
In South Florida, for example, Easton said, it has historically always been a high-barrier-to-entry market, and now with the current capital markets conditions it only makes it harder to acquire and build new product.
“With vacancy rates still hovering around historic lows, and now with the added difficulty to finance new construction, it should further perpetuate rent growth,” Easton said.
“South Florida is still seeing a lot of pre-leasing activity on new construction despite the headwinds other markets are facing.”
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About Lee & Associates South Florida
Lee & Associates South Florida is a fully vertical commercial real estate brokerage firm focused on industrial, office, retail, multifamily, investment and land sectors. Our dedicated team of professionals is led by Matthew Rotolante, CCIM, SIOR a 4th generation South Florida native in a family that has owned and operated commercial property here since 1928. Lee & Associates is the largest agent owned brokerage in the nation with Senior Agent’s ability to earn profit share resulting in the highest splits while still receiving full resources, support and leads from our national network. Our collaborative and cheerful culture allows for open communications throughout the company, fostering the sharing of information and best practices to better enable client decision making. The Lee & Associates’ robust national network that sold and leased over $32 Billion in 2022 offers clients a cross-market platform of expertise and deal opportunities across all asset specialties and representation roles. For the latest news from Lee & Associates South Florida, visit leesouthflorida.com or follow us on Facebook, LinkedIn, Twitter and Instagram, our company local news.
About Lee & Associates
Lee & Associates is a commercial real estate brokerage sales, leasing and management firm. Established in 1979, Lee & Associates has grown its service platform to include over 75 offices in the United States and Canada. Lee & Associates is the largest agent owned commercial real estate brokerage where agents get the greatest return for their efforts and hence are more committed and better enabled to provide superior results for their customers. For the latest news from Lee & Associates, visit lee-associates.com or follow us on Facebook, LinkedIn, Twitter and Link, our company blog.
