US Industrial Real Estate Sales Demand Slows From Record

Industrial demand is on pace to make 2022 the second strongest on record as businesses grabbed warehouse space for most of the year, even in the face of economist concerns about a potential global recession.

The United States is headed toward surpassing 400 million square feet more space leased than put on the market this year for just the second time after 2021's record-shattering 518 million square feet of net absorption, according to Brandon Svec, an industrial analyst and CoStar’s national director of U.S. retail analytics.

Industrial property sales are on track to reach their second-highest annual total of all time after last year's record of $125 billion, though buyers and sellers pulled back in recent months amid worries about rising interest rates and a slowing economy.

"There are a lot fewer investors that are prepared to make deals today and that's driven entirely by the disruptions in the capital markets," Colliers investment sales broker Michael Kendall told CoStar in an interview. "The inflation and recession fears are pushing a lot of capital to the sidelines."

CoStar data shows that despite a pullback from warehouses by such large corporations as online retailer Amazon, leasing of warehouses and other industrial buildings declined only slightly in 2022 from the prior year's record levels as other businesses stepped forward to lease. Demand for space has led to construction plans from California's Inland Empire to Phoenix, Arizona, to New Jersey.

The national vacancy rate at the end of the year is an all-time low of 4%, despite the addition of at least 370 million square feet of warehouse and other industrial space.

“The U.S. industrial market is rounding out another incredibly strong year,” Svec said. “While demand growth slowed from the torrid pace seen in 2021, this year still saw 45% more demand growth than any other year on record.”

Sellers, buyers and lenders have had difficulty agreeing on deal pricing, in part due to the so-called appraisal lag — the inability of real estate appraisers to keep up with valuation changes amid interest rate increases and inflation, Svec said.

“The mathematics of many deals are challenged by the higher interest rates,” Svec said.

Slowing Construction

Higher interest rates have caused industrial developers to pull back new construction starts in the final three months of 2022, CoStar data shows.

However, roughly 687 million square feet of logistics and other industrial space is under construction in the United States, the fastest pace of inventory growth in more than three decades, according to CoStar's latest national industrial report.

That includes massive manufacturing projects that underscore the potential of large investments by the computer chip industry and other manufacturers to drive national real estate development and economic growth.

CoStar is tracking more than 18 electric vehicle, battery and semiconductor plants scheduled to open across the nation over the next two years. Each project is expected to attract suppliers and other businesses will probably generate millions of square feet of additional leasing in coming years.

In one of the biggest projects, Taiwan Semiconductor Manufacturing Co., the world's largest semiconductor maker by volume, said it will triple its investment in Arizona as it plans to build a second computer chip fabrication facility in Phoenix by 2026.

President Biden highlighted his administration’s efforts to boost U.S. computer chip manufacturing this month during a visit to the construction site of TSMC’s first $12 billion fabrication plant on 1,000 acres.

Biden last summer signed into law the CHIPS and Science Act, which provides billions of dollars in incentives to the nation's semiconductor industry. The law aims to help the United States better compete with China, which has its own chip market.