US Industrial Investment Scales Back to Start 2023
Just $1.1 billion in national warehouse sales closed in January
By Greg Cornfield February 24, 2023 6:00 pmreprints
January was a much slower month for industrial real estate sales across the United States when compared to the past three years, suggesting the sector is on a path toward relative normalcy.
A new report from CommercialEdge released Friday shows that just $1.1 billion of warehouse sales closed across the nation in January. That’s considerably less than the $9.9 billion in trades recorded the previous month, and below the $3.6 billion monthly total hit in January 2022. This also comes after investment sales fell 30 percent last year compared to the breakaway year in 2021.
“Rising interest rates are slowing investment across all asset classes, and industrial is not immune, with a higher cost of capital leading investors to reevaluate their allocations and underwriting assumptions,” according to CommercialEdge. “Investors are also worried that inflation could continue to eat away at yield if leases at properties include only minor escalations.”
The run-up in prices and sales over the previous few years created a smaller pool of attractive properties that can pencil out for investors, the report added.
“The average sale price of an industrial property in the fourth quarter of 2022 was $134 per square foot, a 76 percent increase from the first quarter of 2019,” CommercialEdge said.
Average national warehouse rent remains robust at $7.10 per square foot in January, which is 6.9 percent higher year-over-year and seven cents higher than December. Overall “lease spreads,” which are the difference in rent for new leases signed over the past six months and the previous rent for the same property, are also up substantially. Of the 63 markets covered, 44 have lease spreads greater than 10 percent. Per usual, the largest spreads are in the port markets and logistics hubs.
With such big spreads, warehouse properties with leases that expire soon will be most attractive on the buying market, according to CommercialEdge.
“Savvy investors are already seeking out projects with shorter lease expiration schedules and seem to be willing to pay a premium for them,” Peter Kolaczynski, CommercialEdge senior manager, said in a statement. “It’s another opportunity to benefit from the historic run-up in rates as vacancy remains tight.”
Southern California remains the hottest industrial market in the country. The Inland Empire has a lease spread of 28.2 percent, while Los Angeles County’s is 22.8 percent and Orange County’s is 14.9 percent. The market is so tight that demand is spreading to nearby markets, with the Central Valley, Las Vegas and Phoenix also showing strong lease spreads.
The three highest rents in the nation are also in California, with Orange County at $12.87 per square foot, Los Angeles at $12.29, and the Bay Area at $12.12.
Gregory Cornfield can be reached at firstname.lastname@example.org.