Home Safety Apparel Higher interest rates unlikely to dent warehouse demand next year

Higher interest rates unlikely to dent warehouse demand next year

The Federal Reserve’s rate hikes have made themselves felt in a big way among big money that invests in U.S. logistics real estate. But the aggressive monetary policy has, and is expected, to do little to change the cadence of robust leasing activity, low vacancy rates and soaring rents into 2023, according to various experts.

There isn’t much doubt that interest rate volatility during 2022 paralyzed much of the institutional investment community. Many investors went “pencils down,” industry lingo for backing away from potential deals, as a result of a sudden lack of visibility into transaction outcomes. Yet vacancy rates continued to tighten throughout the year and rent growth went along for the ride.

CBRE Group Inc. (NYSE: CBRE), the real estate services giant, said that it expects rents to rise 12% to 15% next year, a direct result of continued strong demand and near record low vacancy rates nationwide. Leasing activity remains solid and will end 2022 as the second best year on record, the company said. Only 2021, when a stunning 1 billion square feet was leased as occupiers rushed to ensure space for surging inventories, was a better year.

According to James Breeze, CBRE’s global head of industrial and logistics research, more than 2 billion square feet of industrial real estate — mostly logistics but some manufacturing — has been leased over the past two years. In addition, much of the new development that came on line during the two-year period has already been spoken for, he said.

“With record low vacancy rates comes significant rental rate growth for the small amount of product that is available to occupy,” Breeze said. In the Southern California and New Jersey markets, for example, average rents are up over 40% compared with this time last year, according to CBRE data.

Colliers International Group Inc. (NASDAQ: CIGI), another industrial real estate services firm, said that new investment slowed to a trickle in response to interest rate turbulence. However, projects already green-lighted are now completing construction, and new projects that were able to obtain funding will deliver speculative, or “spec,” buildings that are erected ahead of any commitments by tenants, said Jack Rosenberg, national director of logistics and transportation at Colliers’ industrial advisory group.

Rosenberg said interest rates moves have never been a big factor in determining the pace of occupier activity. GDP growth has been a far greater influence in dictating demand patterns, he added. E-commerce activity, which rebounded strongly in the latter half of 2022 and is expected to grow smartly in 2023, is affected by rate hikes only to the extent that it slows demand.

Prologis Inc. (NYSE: PLD), the world’s largest industrial real estate developer, took a different view. In a report published earlier this month, Prologis forecast that development starts would decline 60% in 2023 to less than 175 million square feet. The sharp drop in starts is due to the rapid rise of the cost of capital triggered by the Fed’s rapid-fire tightening.

Prologis shared the view that low vacancy will produce another year of double-digit rent growth. Even if new demand fell to zero, an impossible scenario, the national vacancy rate would increase by just 260 basis points to 5.9%, well below the long-term average, Prologis said. 

One market that is going against the grain of tight supply is Chicago, the largest and arguably the most important industrial real estate market in the country. In the fourth quarter alone, 22 projects totaling 9.8 million square feet were completed, the most in the past five quarters, according to Colliers’ data, which showed construction began during the quarter on another 22 projects. 

Sixteen of the completed buildings were spec construction, matching the record total in the third quarter. During 2022, developers completed 64 speculative buildings totaling 20.8 million square feet, 35% more than the previous record set in 2019, Colliers said. The new deliveries came as Chicago’s vacancy rate had dropped to an all-time low. 

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