Green Street Managing Director Vince Tibone, who leads the firm’s Industrial sector research, sat down with Green Street’s Managing Director and Head of U.S. REIT Research Michael Knott to discuss the opportunities and challenges facing the Industrial sector during Green Street’s It’s Not All Doom & Gloom webinar in mid-June. 

With the current state of the market, the biggest debate in the Industrial sector right now is, how long will this kind of tidal wave of demand last and what will be the impact when things start to normalize? 

Rent Growth Projected at 7% in 2023 

According to Tibone, we are seeing a normalization in net absorption and market rent growth coming off a period of historically high leasing demand, as a result of Covid-induced consumption and e-commerce boom. There has been a drop off in net absorption in 1Q23 compared to the back half of last year. However, historically low Industrial vacancy rates has enabled strong landlord pricing power in most markets. 

Green Street estimates that market rents grew about 3% nationally in the first quarter alone, and our full year forecast for rent growth in 2023 is 7%. Although we are expecting some deceleration in the back half of the year, this is still well above the historical average.  

Development starts have been plummeting continuously, down 40% in the first quarter on a year-over-year basis. Given the much tighter construction environment post banking issues, construction starts could continue to trend lower in the near term, resulting in less supply deliveries in 2024 and 2025. As a result, investors could see possible acceleration in rent growth in the coming years: in the high single-digit/low double-digit range in many markets.

Is the Tide Turning for Industrial Property Owners? 

“We are hearing this anecdotal evidence that the largest national tenants are delaying their leasing decisions in a lot of cases,” said Tibone. Vacancy rates are expected to increase about 100 basis points this year and supply should exceed demand by around 150 million square feet, based on our current estimations.  

Tibone suggests that tenants are prolonging big capital decisions given the uncertain economic environment, as well as the moderating sales environment. The most direct ramification of this is development leasing and companies with large spec development pipelines, which will require more time to lease.

For more insight on the Industrial sector, contact us to subscribe to Green Street Research: https://www.greenstreet.com/contact-us. You can also click here to register and watch the full replay of the webinar, "It's Not All Doom & Gloom: Midyear Sector-Level Takeaways."