A new report issued this week by Dallas-based industrial real estate firm CBRE highlighted how general retailers and wholesalers moved to the top of the list for leasing big-box warehousing space in 2023, moving the previous sector in the top slot, third-party logistics (3PL) services providers, into the runner-up position.
CBRE defines “big box” warehouses as being 200,000 square-feet (SF) or larger.
In the report, entitled “2024 North America Industrial Big-Box Review & Outlook,” CBRE said that Food & Beverage was the third most active occupier for big-box leasing activity, at 8.6%, with Automobiles, Tires & Parts, E-commerce Only, and Building Materials & Construction rounding out the top six, at 7.0%, 5.4%, and 5.3%, respectively.
Total 2023 big-box leasing activity fell 15.8% from 2022 to 2023, according to CBRE, coming in at 315.3 million square-feet. And the 6.6% direct vacancy topped 2022’s 3.3% rate, but despite higher vacancies, the report observed that taking rents in 2023 topped the 2022 average by almost $1.00, at $8.08 per square-foot, for a 15.9% increase. What’s more, it added that 413 million square-feet (MSF) of construction was completed in 2023, setting a new record, but construction in progress did not fare as well, coming in at 208.4 MSF, which was half of the 2022 tally, with nearly one-third pre-leased, said CBRE.
James Breeze, Global Head of Industrial & Logistics Research at CBRE, said that there was a higher decline in 3PL activity over the second half of 2023 compared with other occupier types, which coupled with more stable activity from the general retail and wholesale sector allowed them to take the top spot.
When asked if the drop in construction in progress was surprising or expected, given the rapid pace of growth it had seen, coupled with the expected period of cooling, Breeze said it was expected.
“Under construction showed signs of slowing in late 2022 as interest rates started to increase,” he said. “2023 was a difficult environment for construction financing. This along with higher vacancies led to many developers pausing new projects.”
As for conditions expected to stabilize in 2024, Breeze noted CBRE does expect a slight pickup in activity in 2024, especially in transactions over 500,000 SF as the economic picture clears up the second half of this year.
“But we are now in what we call the ‘new normal’ of industrial demand, which is better than pre-pandemic, but not at the record breaking and unsustainable levels of 2021 and 2022 where companies rapidly expanded to hold more domestic inventories,” he said.
While 2023 rent growth was positive, seeing a 15.9% gain from 2022 to 2023, it was below the 25.1% pace it saw from 2021 to 2022.
Breeze said this was due to a changing supply-demand dynamic and also the fact that many markets are at record high rates.
“Just from a math perspective, it’s nearly impossible to keep up with a growth rate over 20%, which would push rents into unsustainable levels,” he said.
For 2024, CBRE said it expects big-box lease transaction volume to increase 5%, with the market settling into a post-pandemic new normal for demand.
“Higher vacancies this year will affect lease terms as rents stabilize and landlords offer more free rent and generous tenant improvement allowances,” stated CBRE. “These conditions will prevail in 2024, as demand will take time to catch up with the recent year’s surge of new development. The current development slowdown offers opportunities for occupiers to secure available space, leading to a gradual decrease in vacancies over time.”
CBRE President, Americas Industrial & Logistics John Morris wrote in the report that CBRE expects 2024 to come in as the third-highest year for industrial big-box leasing, topping 2022 but falling short of 2022 and 2021 activity.
Morris added that the current level of what he called abundant supply in the market is likely to be short-lived due to the significant reduction in construction starts and leading to more landlord-friendly conditions.
“Macroeconomic and geopolitical trends will greatly influence industrial market activity,” wrote Morris.