NAI Global Industrial CRE Experts Predict Big-Box Inventory Shortage by 2024

November 2022 // NAI DESCO Blog

The CRE Logistics Journal from NAI Global (November 2022)
Trends and Insights on Industrial Real Estate by Experts in Multiple Markets

NAI Global Industrial CRE Experts Predict Big-Box Inventory Shortage by 2024

The recent industrial and logistics virtual meeting hosted by NAI Global and moderated by Steve Pastor with NAI James E. Hanson in Teterboro, New Jersey, had one huge takeaway, and the takeaway comes with significant consequences that will likely impact the warehouse, distribution and logistics facilities marketplace in the U.S. well into 2025 and perhaps beyond.

Expect a supply gap by 2024: With some exceptions, developers are pulling back on building big-box industrial buildings (+/-1,000,000 square feet) on a speculative basis. Even institutional players such as Prologis have made it clear that they are taking a wait ‘n see approach to the market and only moving forward with projects they have already started, or build-to-suits. According to multiple NAI Global participants in the recent Zoom meeting, merchant developers are especially putting projects on hold. The combination of elevated construction costs and high interest rates as well as economic uncertainty is halting development projects in New Jersey, Chicago, Louisville, Oklahoma City, Allentown/Bethlehem and other U.S. markets.

There are two other contributing factors to a slowing development pipeline; capital is scared, and lenders are scrutinizing deals more closely and even in markets such as Dallas, where there is a lot of industrial spec underway (one of the exceptions), industrial occupiers that require between 20,000 square feet and 80,000 square feet are returning to leasing facilities rather than buying property for business operations.

Yet the number one reason NAI Global industrial pros are forecasting an industrial supply shortage by 2024 is because demand remains high – again with some exceptional markets that are slowing and thus, there is 6 months to 12 months of available industrial product in the U.S. that will largely by absorbed in 2023. With few new starts in the coming year, there will not be enough industrial inventory by 2024, the thinking goes.

Rental Rates and the Hockey Stick Metaphor – Part II is Coming: Beginning in 4Q2021, industrial rental rates across the U.S. exploded and have continued to this day. If one charted the rise in industrial rental rates, it would look like a hockey stick, with a slightly sloping section at the bottom of the chart to express the period from late 2019 to the third quarter of 2021 and then a near vertical rise over a short period of time. The NAI Global industrial experts participating in the November Zoom meeting are predicting that rental rates will begin to flatten (even with demand still strong) as we move into 2023 and the economy stutters. However, by 2024 when (and if) demand remains steady, there will be shortages of supply and rental rates will again take off and chart like the handle of a hockey stick.

Other highlights and takeaways from the November Logistics Meeting:

Investment sales transactions are falling apart, being retraded during the sales process and selling at discounted rates.
In Louisville, an institutional investor listed a 150,000-square-foot industrial building for sale at $16 million, or a little more than $100 per-square-foot, and when the market didn’t respond, the seller has lowered the price to $14 million. In New Jersey, spec developers with projects between 200,000 square feet and $500,000 square feet are not getting the level of inquiries they had expected or hoped for and are doubling down on marketing efforts to attract tenants or buyers.

Dallas – Industrial Boomtown USA. In the recent 12 months developers brought 39 million square feet of new industrial product to market and 33 million square feet of it has been absorbed. Industrial rents have increased 14% during that time, and the overall vacancy rate is a low 5.5%. Of the 80 million square feet under construction now, approximately 20 million square feet has been pre-leased and about 60 million square feet is available. Texas Instruments – mostly likely incentivized by the U.S. CHIPs Act, announced plans to build a $30 billion semiconductor chip production facility in Sherman, Texas, which is northeast of Dallas.

ESG Demand is Growing. One of the Zoom participants described a series of meetings with a prospect for a multi-market, Corporate Services engagement, with the corporation mandating that any building under consideration for occupancy would have to meet certain Environmental, Social and Governance (ESG) standards. Translation, older industrial buildings won’t work, mainly because of air quality issues, and the company expects solar power to be part of the energy solution for each property it would occupy.

Thought Leaders: Steve Pastor, NAI James E. Hanson, Teterboro, NJ
Fred Meyer, SIOR, NAI Mertz, Mount Laurel, NJ
Adam Roth, SIOR, CCIM, NAI Hiffman, Chicago, IL
Mike Stanzel, SIOR, NAI Robert Lynn, Dallas, TX
Mike Adams, NAI Summit, Allentown, PA
Mark Wardlaw, NAI Fortis Group, Louisville, KY
Matt Osowski, NAI Ohio Equities, Columbus, OH
Patrick Lennon, NAI James E. Hanson, Teterboro, NJ
Christian Davey, NAI Cressy, Mishawaka, IN
Mike Chambers, NAI Brannen Goddard, Atlanta, GA
Steve Martens, CPM, CCIM, SIOR, NAI Martens, Wichita, KS
Hal Johnson, SCCED, NAI Earle Furman, Greenville, SC
Jeff Wilke, NAI Latter & Blum, Baton Rouge, LA Jeffrey Licht, SIOR, NAI Mertz, Feasterville, PA
Clark Everett, NAI Sullivan Group, Oklahoma City, OK
Michael Royce, SIOR, NAI KLNB, Tysons, VA
Jon Hickey, NAI Emory Hill, New Castle, DE