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Flight to Quality Boosts Leasing for New Industrial Buildings

Older industrial buildings are falling out of favor as businesses double down on amenities, functionality, and efficiency. According to a new report from CBRE, tenants in properties developed between 2000 and 2022 are increasingly moving into newer facilities, preferring features like higher ceilings, more power, and enhanced distribution amenities.

This trend in industrial leasing is evident in the net absorption figures for properties built in the last three years compared to those delivered in the 22 years before 2022. On one hand, the absorption of industrial space built between 2023 and 2024 has reached 395 million square feet since Q1 2023, while properties constructed in the previous 22 years have experienced 17 million square feet of negative net absorption.

The starkest effect of this trend is reflected in the leasing statistics for industrial spaces older than 25 years. That subgroup, according to CBRE, has seen negative net absorption reach 139 million square feet during the same period.

"As occupiers leave older facilities, investors should consider either selling them to the growing pool of owner-occupiers, renovating them to meet modern standards, or converting them to other uses," the report states. "Another option for well-capitalized investors is to hold these assets until market conditions for secondary and tertiary products improve."

Although CBRE found a significant difference in demand for newer versus older industrial spaces, the firm noted a clear bifurcation in vacancy rates between these groups. Despite ongoing negative net absorption, the vacancy rate for industrial assets built before 2000 is only 3.6%, while properties constructed after 2022 have a vacancy rate of 44%. Given that the stock of industrial space built before 2000 amounts to 13 billion square feet, even a slight increase in vacancy reflects a considerable change in net absorption.

This analysis follows CBRE's report from two months ago, which indicated that the overall vacancy rate for industrial real estate reached 5.6% at the end of the second quarter. The firm noted that this figure reflects a 30-basis-point increase due to an imbalance between new supply and demand, along with the completion of 121 million square feet of new space in that quarter.

Additionally, the July analysis found that year-over-year net absorption of industrial space declined by approximately 50%, down to 65.8 million square feet. The total square footage under construction has decreased for six consecutive quarters, reaching its lowest level since Q3 2019, which CBRE suggests could lead to higher rents over time.

 

 

Reprinted with permission from the Thursday, 26 September 2024 05:15:04 EST online edition of GlobeSt © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.