Industrial Outlook

CoStar data shows that industrial rents increased nationally by 6.4% in 2023, down from their 10.7% high in 2022 although the rate of growth is expected to drop to 3.6% in H1 2024.¹³

Figure 6: Industrial Market Fundamentals by Year with Forecast Figure-5

Source: Industrial, United States, CoStar Group Data, January 2024.

The rent growth in the industrial sector slightly outpaced cap rate expansion to make for relatively flat pricing. From our vantage point, industrial cap rate expansion has generally stabilized, but transaction volume still suffered mainly due to illiquid capital markets, which according to MSCI Real Capital Analytics, individual asset sales dropped by 64% year-over-year.¹²

While the industrial sector enjoys relatively strong underlying fundamentals, it is not immune to some short-term volatility. Due to disruptions in global supply chains and uncertainty in capital markets, 12-month net absorption has decreased, according to CoStar’s latest data. Amid softening absorption, roughly 468 million square feet of industrial projects are set to be delivered in 2024, which will likely push up the national vacancy rate and put downward pressure on rent growth.¹³

In the meantime, lower rates of new construction are a balancing factor to moderating rent growth. CoStar reported that new construction starts fell to a 10-year low during Q3 2023, which is attributable to a generally reduced appetite for construction loans that are currently expensive due to high interest rates.¹³ But while vacancies are expected to rise in 2024, Cushman & Wakefield expects vacancies to peak in early 2025 at around 6.2% but remain 200 bps lower than the historical average.¹⁴ With the assumption that new construction remains muted in H1 2024, it is likely that the lack of new inventory in late 2024 and early 2025 will lead to a new cycle of tightening vacancies which we expect to begin in 2026.

CrowdStreet’s Strategy

Due to strong rent growth in the industrial sector, relatively flat short-term appreciation has translated into a higher average yield on cost for some new developments. This phenomenon has served to keep underlying fundamentals more intact relative to other asset classes and has facilitated an environment where industrial projects are generally easier to finance than multifamily projects. To that end, while tough lending standards are plaguing the CRE landscape, we are observing that local and regional banks are relatively more willing to lend on industrial assets, especially smaller industrial facilities that require smaller loans.

For projects where the potential yield on cost appears justifiable even in an expanding cap rate environment, specific development opportunities might be worth considering. Specifically, projects located in undersupplied markets with unique features such as modern infrastructure and amenities or those that fit into today’s shifting demand landscape.

We also find interesting specific acquisition opportunities, especially those with a strategy to lease up current vacancies in tight markets with strong pre-leasing activity. We see the ability for operators to potentially add value to an existing asset if they budget exit values that adequately reflect higher exit cap rate assumptions.

We anticipate that the “friend-shoring” trend will continue in 2024, which involves moving industrial production to the shores of political allies and bringing more manufacturing to neighboring Mexico.¹⁵ As more goods flow into the U.S. from Mexico, it may increase demand for distribution space in markets like Texas.

Finally, we will keep an eye out for any distressed situations. However, due to relatively stable sector fundamentals, we may not see any truly distressed industrial deal flow in 2024.

12. Capital Trends, US Industrial, MSCI Real Capital Analytics, November 2023.

13. CoStar, Markets, Industrial, Data Export, December 2023.

14. “Rising Vacancy Rates is Key Macro Trend for Industrial”, GlobeSt, December 2023

15. “Industrial Production Shifts to Mexico Drawn by Labor and Location Advantage,” Savills, December 2022.