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\u201cIndustrial has been the darling sector of commercial real estate for a while, especially post pandemic,\u201d said Mehtab Randhawa, global head of industrial research for JLL<\/strong>. Pandemic shopping and online and e-commerce sales in 2021 posted record volume numbers, which sent demand for industrial space skyrocketing. That pent-up demand carried on throughout last year, as record low vacancies paired with record high rents across a variety of industrial sectors.<\/p>\n However, despite high demand for leasing and development, announcements from large players of pullbacks in plans and operations made investors wary.<\/p>\n Early in 2022, Meta<\/strong> announced it would invest a combined $2.4 billion in new data centers. But in December, projects in Denmark, Alabama and Texas came to a grinding halt<\/a>.<\/p>\n Similarly, Amazon, slowed down the growth of its industrial footprint<\/a>. The company put some 10 million square feet of space on the market for subleasing while simultaneously cancelling development plans in California, New York, Atlanta and New Jersey.<\/p>\n While some took the development pauses as indications of a faltering industrial market, others saw the decisions as opportunities for new companies to secure space.<\/p>\n \u201cWhile these companies took a step back, there was a lot of pent-up demand on the sidelines from other companies at the same time,\u201d said Randhawa. Companies which had missed opportunities to sign and execute leases quickly took up the newly vacant space. That trend is likely to continue for the rest of this year.<\/p>\n Image by Rawf8\/iStockphoto.com<\/p><\/div>\n Continuing throughout this year, given current macroeconomic conditions, demand is expected to remain relatively stable. \u201cThere is still pent-up demand out there,\u201d said Randhawa. \u201cWe will definitely not see a 2021 again. That, I think, is once in my lifetime in terms of industrial,\u201d.<\/p>\n Although 2023 will not mirror 2021, the industrial leasing market is still high on a 10-year horizon, according to Randhawa. The extraordinary levels seen in the past two years were unsustainable for long-term demand.<\/p>\n According to Carolyn Salzer, director & Americas head of logistics and industrial research at Cushman & Wakefield<\/strong>, leasing activity as of the third quarter of 2022 was on track to finish the year with more than 700 million square feet of new industrial leases. Cushman & Wakefield has registered numbers of this magnitude only in the past two years.<\/p>\n \u201cWe anticipate a significant cooling compared to the past few years of expansion,\u201d said Salzer. \u201cThat\u2019s not to say we expect anything like the slowdown we saw in 2009 and 2010 because the fundamentals are in a much better spot. While demand is projected to slow and vacancy tick up, we will still be well below the level we were at before the global financial crisis.\u201d<\/p>\n Factors expected to contribute to the slowdown in industrial leasing this year include extended decision-making times, pressure from C-suite executives to slow both overall spending and real estate transactions, and a decline in construction starts.<\/p>\n \u201cThe slowing of construction activity will help moderate rising vacancies,\u201d Salzer told Commercial Property Executive. <\/em>\u201cIt won’t be without its challenges in the coming few quarters, but industrial will continue to be a great opportunity to invest in as one of the more desirable and recession-resilient asset types.\u201d<\/p>\n What is unique about industrial, and one of the factors that could keep it afloat in a hard year, is that consumer spending has not drastically slowed. Rather, personal spending was seen to increase throughout October and November of last year. According to the U.S. Census Bureau, the third quarter of 2022 saw a 66.4 percent increase in e-commerce sales.<\/p>\n As Randhawa notes, there are three major big-ticket items people buy: cars, homes and vacations. None of the three have completely returned to pre-pandemic sales levels. That leaves consumers with disposable income for a wide variety of retail goods. Especially with rising interest rates deterring the public from investing in homes, smaller purchases are fueling industrial demand. As consumer spending continues, leases get signed, warehouse lights turn on and trucks get put on the road.<\/p>\n Even with consumer spending staying par for the course, other factors such as rising interest rates and a looming recession will impact industrial leasing this year. As interest rates climb and a recession appears to loom, capital markets activity will slow. Financing and leasing will slow in turn.<\/p>\n\n\n \u201cWhen we enter the anticipated recession in the first or second quarter, we will see deceleration in the leasing market,\u201d said Salzer. \u201cIt will look worse when compared to the past several years but will still be positive compared to some other asset types.\u201d<\/p>\n Chris Wimmer, CFA, senior director in Fitch Ratings\u2019 <\/strong>U.S. corporate group, told CPE <\/em>that rising interest rates are a key factor in REITs\u2019 tenants pausing expansion plans or making overall leasing decisions.<\/p>\n \u201cWhile most REITs rated by Fitch have the capacity to withstand such a slowdown, smaller-scale developers that lack balance sheets and liquidity will be forced to dispose of their projects, likely at distressed prices,\u201d said Wimmer. \u201cREITs that maintain ample dry powder will find distressed acquisition opportunities when developers are unable to finance projects to completion or to place recession-wary tenants, especially for properties built on speculation.\u201d<\/p>\n Interest rates and a potential recession will impact every aspect of commercial real estate and industrial is not immune. It is a given that leasing activity will decline below levels of the past few years. That said, however, industrial will likely outperform other commercial real estate sectors.<\/p>\n Certain industrial tenants will create significantly more deal and leasing activity than others throughout this year. One key factor that experts will play a part in this trend is the regionalization of manufacturing. \u201cThat is a long-term megatrend to watch for industrial,\u201d said Randhawa. \u201cAlthough we are dominated by the warehouse distribution segment, manufacturing is definitely making a comeback.\u201d<\/p>\n For several years reshoring has been a big topic of conversation. Now, it is a reality. In an effort to diversify risk, manufacturers are investing dollars, breaking ground and beginning production in new facilities.<\/p>\n Salzer agreed that it is safe to predict ramped-up activity by manufacturing and adjacent tenants in 2023. \u201cAs companies look to diversify their supply chains, it makes sense to start bringing space back to the U.S. and North America,\u201d said Salzer. That should also boost activity in related areas, such as third-party logistics.<\/p>\n Taking into account longstanding supply-chain issues, Wimmer believes that consumer product tenants, and domestically based companies, should continue to do well.<\/p>\n In contrast, leasing activity for pure-play ecommerce tenants has fallen, according to Randhawa. The tenant sectors that have bounced up are mostly in manufacturing, dominated by automotive companies including electric vehicles and batteries. Randhawa predicts that pure-play 3PLs, manufacturers, and logistics and distribution retailers could be taking more space during 2023.<\/p>\n What types of space will they lease? One indicator: More spaces larger than 1 million square feet have been leased recently than in the past five years. In all of 2021, 58 leases of that size were signed nationwide. By the third quarter of 2022, 56 deals had already been transacted, Salzer reported. Activity for spaces of 500,000 square feet or more also surged. \u201cSo the bigger sizes have made a comeback.\u201d The number of smaller leases ranging from 50,000 square feet to 100,000 square feet also increased last year compared to 2019 and 2020.<\/p>\n Randhawa similarly stated that demand for mega-box spaces has been high, a trend that globally is likely here to stay. Once tenants know which market they want to be in, finding the right location as well as properties with sufficient efficiencies can be a challenge. Tenants are willing to sign these larger spaces with other factors considered working on their behalf.<\/p>\n![\"\"](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/02\/iStock-1210578438-Image-by-Rawf8.jpg\")
<\/a>A glimpse ahead<\/h2>\n
Key factors<\/h2>\n
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\u201cAlthough we are dominated by the warehouse distribution segment, manufacturing is definitely making a comeback.\u201d<\/h2>\nMehtab Randhawa, global head of industrial research for JLL<\/cite><\/blockquote>\n\n\n
Trendsetting tenants<\/h2>\n
Hot markets<\/h2>\n