SPECIAL ADVERTISING SECTION

INDUSTRIAL REAL ESTATE

By Matt Smith

The US industrial real estate sector is resetting, following two years of pandemic-driven expansion. Net absorption has slowed, vacancies exceed 7 % by some measures and underconstruction developments have halved as builders seek to prevent oversupply from depressing rents.

AI-related demand for data centers and a new wave of reshoring and nearshoring is shifting growth toward Texas, the Midwest and inland ports and away from coastal gateways. This occurs as institutional investors— formerly the dominant buyers— have done little over the past 9 to 12 months.

Midsize, well-capitalized companies are now able to buy properties they had formerly been leasing, said Bob Andrews, executive vice president and head of West region at Illinois-based CenterPoint. The business develops, acquires and manages industrial properties in America’ s top port markets, with a portfolio spanning more than 60 million square feet of industrial space and 388 tenants nationwide.

“ Most of these users have had a tough time competing with institutional capital … [ but ] now there’ s a willingness by a lot of the institutional owners to offer properties for sale, and that’ s created these buyer opportunities,” Andrews said.

Sellers can no longer command the same prices as when institutional investors were the buyers, noted Andrews. Sale prices of A-grade facilities remain stable, but B-grade facility prices have softened.

“ There was so much investor capital out there that it pushed [ end ] users [ who ] could not compete, but now that investor activity has slowed, it’ s created opportunities for these buyers to come in,” Andrews said.

Prices are weakening. In the first quarter, rents fell in 33 of 83 markets quarter on quarter, according to Cushman & Wakefield. However, nationwide rents are still approximately 65 % higher than pre-pandemic levels.

Surging occupancy costs spurred more companies to explore buying the buildings from which they operate, Andrews said. Most transactions involve premises of less than 200,000 square feet, although some companies with nationwide operations are beginning to seek deals for significantly larger buildings.

CenterPoint has completed seven sales in the past 9 to 12 months in which it offloaded buildings of less than 200,000 square feet to end-user companies.

Typically, a higher percentage of companies operating from smaller premises— those spanning less than 100,000 square feet— are owneroccupiers. In contrast, the larger the facility, the more likely a company is to prefer to be a tenant, which provides greater financial flexibility and the option to deploy capital elsewhere than real estate, Andrews explained.

In the first quarter of 2025, approximately 123 million square feet of industrial real estate was leased in the United States, the biggest quarterly total since April-June last year, according to consultants JLL.

CBRE gives a different figure, estimating 189.1 million square feet of industrial real estate was leased in the first quarter. This is down 2.5 % year on year over the same period, as new leasing activity rose 2.4 % and renewals fell 11 %.

Lease renewals remain strong, Andrews said; landlords are prioritizing occupancy levels and offering more favorable, flexible terms and improved concessions. Leases are usually for 5 to 10 years.

Nearly 80 million square feet of new industrial real estate was delivered in the first three months of this year, with an additional 219 million square feet to be completed within 2025, JLL forecasts.

“ Tighter labor and higher input costs along with more subdued occupier demand could result in further downward pressure on new starts. This could help balance a potential demand shortfall,” noted a May 21 report from commercial real estate advisor Newmark.

Vacancy rates on the rise In the first quarter, vacancy rates rose 20 basis points quarter on quarter

46 Journal of Commerce | July 7, 2024 www. joc. com