A Pandemic Darling, Investor Demand For Industrial Properties Slows

After being a hot commodity during the COVID-19 pandemic, investors’ appetite for industrial properties has cooled.

Industrial is still one of the most desirable asset types, but challenges in the economy have slowed activity in the investment sector.

In the first half of 2023, industrial sales across the U.S. amounted to $21.2 billion, a significant decline from the $55 billion recorded during the same period last year, according to the recently released CommercialEdge National Industrial Report.

Although transaction volume has declined this year, the average sale price for industrial property has increased slightly from $124 per square foot last year to $129 per square foot this year.

“Despite the deceleration in sales volume across all commercial property types, there is still a significant appetite for high-quality industrial assets,” the report states.

The report noted that Prologis Inc. paid Blackstone $3.1 billion for a 14 million-square-foot portfolio across about 70 properties in Southern California, Atlanta, Dallas and Washington, D.C.

“Based on industrial property outlooks, there is hope that the transaction could help provide valuable sales comps for where the transactions market is at in 2023 and help close some of the bid/ask gaps,” the report states.

While industrial fundamentals remain strong, higher interest rates and normalized demand have slowed the construction of industrial properties. During the first half of the year, 147.1 million square feet of industrial space broke ground, a 53% decline from the same period last year.

“‘Normalization’ is our industrial word for the second half of the year,” CommercialEdge Senior Manager Peter Kolaczynski said.

Industrial properties have enjoyed significant rent growth, especially in port markets where tenants continued to pay hefty premiums for new leases. In Los Angeles, for example, new leases signed in the past 12 months averaged $19.92 per square foot — $7.20 more than in-place rents.

Southern California had the largest rent gains nationwide with in-place rents jumping 17.4% in Inland Empire over the last 12 months; 13.2% in Los Angeles; and 10% in Orange County.

East Coast ports also are witnessing substantial gains, with Boston in-place rents growing 10.3%, New Jersey up 8.8% and Bridgeport, Connecticut up 8.5%.

Phoenix, which is experiencing a manufacturing boom and receives overflow activity from Southern California, is the only market not near the water in the top 10 for rent growth.

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