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IRE Continues to Feel Pressure

In 2022 the industrial real estate market is expected to continue experiencing a shortage of space and high rents while the industry works to create more warehouse stock to meet the growing need.

Robust demand and construction delays slashed the overall industrial vacancy rate down to 3.6% in the third quarter of 2021, with record year-over-year asking rent experiencing growth of 10.4%, reports the global commercial real estate firm CBRE.

Occupiers who signed five-year leases in 2016 with an average 3% annual rent increase now face much steeper 25% average increases when they make new occupancy decisions.

Many markets will see even higher increases. An occupier with a five-year lease expiring in Central New Jersey will see the biggest average increase in the U.S. at 64%, followed by Philadelphia and the Inland Empire at 62%.

California markets dominate five-year rent growth stats because of their low vacancy rates and large population concentrations, CBRE says.

The company stresses that an occupier with a 10-year lease expiring today can expect even steeper rent increases.

Industrial market conditions favored occupiers in 2011, when the overall vacancy rate stood 5.1 points higher at 8.7%. Asking rents in 2011 were 67% lower than today, with much smaller annual rent escalations.

“Overall, occupiers may face rent increases of between 65% and 75% compared with the lease they signed in 2011,” the company reports. In spite of this sticker shock, the overall demand for industrial space hasn’t faltered a bit.

CBRE holds that a rebounding U.S. economy, the growing need to hold more inventory onshore and increased ecommerce sales are what led to record leasing of 826 million square feet year-to-date through October 2021.

It also says that industrial occupancy planning has become highly strategic given today’s tight market conditions and the inescapable need for companies to optimize their supply chain networks, which was thrown into high relief during the current supply chain crisis.

Nevertheless, rising prices may have some impact on demand over the course of 2022, according to the CBRE analysis

Optimism Grows for Economy

The economic recovery and the accelerated buildout of ecommerce and third-party logistics last-mile facilities, fulfillment centers and bulk warehouses will reinforce demand for industrial real estate in North America, say analysts for the industrial real estate giant Cushman & Wakefield.

“Although the COVID-19 pandemic brought on new challenges for the industrial market, with port congestion, materials shortages, and commodity pricing skyrocketing, the market has and will
continue to excel,” report Rebecca Rockey, who is head of economic analysis & forecasting, global research, and Carolyn Salzer, senior research manager, industrial logistics, global research for the company.

The forecast for North American industrial absorption from 2022 to 2023 is a healthy 855 million square feet (msf).

New supply – which trailed demand significantly in 2021 – will revert to outpacing demand slightly over the next two years. Specifically, C&W predicts that new deliveries are projected to reach 932 msf from 2022 to 2023.

Nonetheless, North American vacancy will remain low, ending 2023 at 4.1% — an increase of only 30 basis points (bps) from year-end 2021. Despite the forecasted uptick, North American vacancy will remain 170 bps below its 10-year average (2012-2021) of 5.8%. Average net asking rents in North America will increase to a new nominal high of USD 8.72 per square foot by year-end 2023.

Supply-side constraints, such as onerous municipal approval processes, will continue to constrain supply growth in Canada where overall net rents will remain the highest in North America at USD 12.37 psf by the close of 2023.

Rockey and Salzer says the key takeaways are:

  • Industrial demand is still booming, supply is going to catch up and alleviate some of the pressure by 2023
  • Strong market fundamentals will continue to generate strong rent growth that will continue throughout the next few years
  • Markets will remain tight on available quality space, despite record deliveries to come
  • Pandemic issues will begin to subside into 2022, bringing a bit of equilibrium back to the market

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