Transformative Shifts: A Recap of the Industrial Sector’s Performance in 2023

Prominent ports reverted to pre-pandemic activity levels, influenced by subdued demand and changing consumer preferences. Image by Vanit Janthra/iStockphoto.com

In 2023, the industrial sector underwent significant changes characterized by the normalization of port activity, a surge in North American manufacturing and the impact of interest rate hikes on transactions and development, according to the latest CommercialEdge industrial report.

Major ports experienced a return to pre-pandemic levels, handling 17 percent fewer containers through October, due to subdued demand and shifting consumer preferences. The normalization of port activity was also influenced by manufacturers embracing nearshoring and reshoring, marking a potential turning point in U.S. trade, with Mexico surpassing China as the top trade partner.

Interest rate hikes in 2023 had a downward effect on transaction volume, totaling $48.6 billion by November, a notable decrease from record-setting years in 2021 and 2022. Despite the decline in sales volume, the average sale price of industrial properties increased by 6 percent, reaching $130 per square foot. The year also posted record-breaking deliveries of over 508 million square feet, surpassing the previous year’s figure, although starts decreased significantly to 282.4 million square feet in 2023 from 598 million square feet in 2022.

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The under-construction pipeline featured 505.2 million square feet of industrial space at the end of November, or 2.7 percent of total stock, CommercialEdge data shows. Industrial construction has nearly halved this year due to increased financing costs and reduced demand for new space. Despite the overall slowdown, Dallas and Phoenix remain at the forefront of national industrial development, jointly contributing over 17 percent of all starts across the country.

Dallas initiated 26 million square feet of starts and Phoenix saw 22.6 million square feet. However, both markets experienced a significant decline compared to the previous year, with Dallas starting 49 million square feet and Phoenix 41.3 million square feet in the same period. Industrial investment year-to-date in November amounted to $48.6 billion, with properties trading at an average of $130 per square foot.

Southern California leads with double-digit growth

National in-place rents for industrial space averaged $7.60 per square foot in November, up 770 basis points year-over-year and 4 cents more when compared to October 2023, CommercialEdge data shows. The Southern California region continued to dominate the national rankings, having the only three markets where rents grew by double digits in the last 12 months. Rents increased 15.2 percent in the Inland Empire, 12.7 percent in Los Angeles and 11.6 percent in Orange County.

Meanwhile, national industrial vacancy remained virtually unchanged from the previous month, clocking in at 4.6 percent at the end of November. Starting near 4 percent in the first half, the vacancy rate increased in the second half due to normalizing demand and the influx of new supply, with the Inland Empire seeing rates rise from below 2 percent at the beginning of the year to 4.9 percent in November.

Read the full CommercialEdge report.