While the industrial real estate market continues to soften, there are green shoots driven by rent growth, decreasing supply, and increased market demand.

The softening described in our Q2 2023 Industrial Real Estate update continued through the second half of the year with industrial transaction volume decreasing 44% to $89.2 billion. This was not unexpected given the interest rate uncertainty present for much of 2023 and the higher cost of capital many real estate firms continue to face. Here are some key takeaways:

  1. The increased cost of capital negatively impacted appraisals. Combined with slowing rent growth, this led to the NCREIF Industrial sub-index being down -0.3% for the quarter and down -5.3% for calendar 2023.
  2. Average asking rent growth came in at 6.5%, playing out the slower growth trend over the last year and a half. The highest rent growth was in Phoenix, Las Vegas, Austin, Florida, and North Carolina. (Source Prologis)
  3. Completions have exceeded absorption over the last 6 quarters. As noted in our Q2 2023 industrial real estate update, roughly 28% of industrial real estate is greater than 50 years old and will need to be replaced as tenants continue to focus on modern, Class-A space. Nearshoring/Onshoring continues to pick up speed.

Like the green shoots of spring, the resilience of industrial real estate can be seen in the smallest of ways. This is evident in the 50% YoY decrease in new starts—continuing the trend seen in previous quarters -that should help the market reach equilibrium in the near-to-medium term—the early signs of a new season of growth.

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