Trends Influencing Industrial Space Through the End of 2023 and Beyond

In this article, you'll learn:

• Key trends shaping the future of industrial space beyond 2023.
• Why demand for tech-enabled and sustainable warehouses is rising.
• How increasing construction is influencing vacancy rates and rent trends.
• The impact of declining leasing activity on the industrial real estate market.

As we navigate through a rapidly evolving business landscape influenced by shifting consumer behaviors, technological advancements, and the need for efficient supply chain operations, the demand for warehouse space is poised to experience significant shifts.

From e-commerce growth to sustainability initiatives and technological advancements, let’s explore the transformative forces driving this dynamic sector which continues to be the most successful leg of the commercial real estate industry. Join us as we uncover the future of warehouse demand throughout the latter half of 2023 and beyond.

A Dip in Leasing Volume

The industrial real estate market has experienced a notable dip in leasing volume. According to preliminary data, the leasing volume in Q1 2023 has dropped by 16.3% compared to the previous quarter.

This decline suggests a cautious approach by companies when it comes to securing industrial space for their operations.

Interestingly, a significant portion of the leasing activity in Q1 comprised new-to-market deals, accounting for 61.5% of industrial leases. This indicates that companies are strategically expanding or establishing their operations in markets that align with their goals and objectives. These new leases reflect a deliberate approach to market entry and expansion, rather than mere portfolio adjustments.

In terms of vacancy rates, there has been a slight increase of 40 basis points from the previous quarter, resulting in a vacancy rate of 3.8%. However, it is worth noting that several markets are still maintaining vacancy rates below 2.0%. This suggests that while there may be a slight uptick in overall vacancies, certain regions or markets continue to experience strong demand and tight availability of industrial space. Learn the Top 5 Markets for Industrial Space. 

Overall vacancies for the industrial space remain low as it continues to be the strongest performing asset in the commercial real estate field.

Learn how to find the best warehouse for the best price, no matter the overall leasing outlook by enrolling in the free course below. 

Rent Growth

Despite an initial dip in leasing volume, there is still notable rent growth in the industrial market as a whole.

Because as companies continue to adapt to changing consumer behaviors, supply chain disruptions, and the increasing prominence of e-commerce, the need for efficient warehouse space has intensified. This demand has been reflected in an increase in the average asking base rent.

Moreover, the growing importance of technology and automation in warehouse operations has contributed to the increasing value of well-equipped and technologically advanced warehouse spaces. Because companies seeking modern, efficient facilities with advanced features and systems are willing to pay a premium for such properties, further driving up the average asking prices.

This leads into our next point that the push for premium buildings will continue throughout the latter half of 2023 and beyond.

The Demand for Premium Properties 

The demand for premium and efficient warehouse spaces has significantly impacted the value and desirability of Class A properties in the industrial real estate market.

Class A assets, known for their modern features, state-of-the-art technology, and prime locations, have remained the most attractive and actively leased subtype, accounting for a substantial 68.5% of signed industrial leases.

And this emphasis on Class A properties has had a direct effect on average rental rates in the market. As anticipated, the average asking rates for leased warehouse spaces have experienced a notable increase because while e there has been a dip in overall leasing activity, the higher concentration of leases being signed for Class A properties has driven up the average rental prices observed in the market. As businesses prioritize efficiency, advanced technology, and strategic location advantages, they are willing to pay more for buildings that meet these needs rather invest in the buildout and upgrade of existing facilities. 

Consequently, this focus on premium properties has also led to a relative devaluation of other warehouse classes, such as Class B and Class C properties. The increasing demand for Class A spaces has created a disparity in rental rates between different property classes, further highlighting the preference for modern, high-quality warehouse facilities.

Due to the prominence of behemoth online retailers like Amazon, businesses everywhere are trying to keep up. Consumers have gotten used to a new standard of convenience and businesses are following the money. As such, the demand for efficient industrial space has skyrocketed. And this brings us to our next point. In these new modern facilities that make incredibly fast delivery possible, there’s a great deal of technological evolution.

Tech Integration

The evolution of warehouses is poised to become increasingly intertwined with highly efficient technology, driven by the proliferation of smart devices and the growing reliance on the internet. This shift is expected to shape the demand for data centers, tech-focused commercial properties, and tech-enabled warehouses.

With the continuous growth of e-commerce, cloud computing, and emerging technologies like the Internet of Things (IoT), the demand for data centers will continue to surge.

So there will be an increasing demand for other tech-focused commercial properties and tech-enabled warehouses. These properties are designed and equipped to accommodate the integration of advanced technologies such as automation, robotics, artificial intelligence, and machine learning. Tech-enabled warehouses leverage cutting-edge technologies to enhance operational efficiency, optimize inventory management, and improve overall supply chain performance.

Another significant trend shaping the future of warehouses is the growing demand for green and sustainable commercial properties. As ESG initiatives gain momentum, businesses are seeking eco-friendly solutions in their operations because if they don't they might ace serious fines. This translates into a rising demand for warehouses that incorporate energy-efficient designs, renewable energy sources, waste reduction strategies, and environmentally conscious materials and practices.

As a result, developers and investors are increasingly integrating ESG principles into warehouse design, construction, and management practices. Learn How Commercial Tenants Can Protect their Budgets With New Green Restrictions. 

Construction Pipeline

Driven by the rapid growth of e-commerce and the need for efficient logistics operations, developers responded by embarking on an unprecedented level of warehouse construction projects.

According to industry reports, there is currently an impressive 620.5 million square feet of warehouse space under construction nationwide.

The year 2023 is poised to be a significant turning point, with almost 90% of the ongoing construction projects expected to be completed and available on the market by the end of the year. This influx of new warehouse inventory will have a profound impact on the commercial real estate landscape, providing tenants with an abundance of options to choose from.

An increasingly oversaturated market will likely drive the vacancy rate back up, which is expected to continue through 2023. But this is good news for prospective warehouse tenants though. The rent growth is expected to dramatically cool done in relation to the increased supply.

As the market continues to experience the entry of a significant number of new warehouses in 2023, tenants should seize this opportunity to secure favorable deals and optimize their logistics operations. By capitalizing on the increased supply and competition, tenants can negotiate advantageous lease agreements, reducing their occupancy costs and positioning themselves for success in the evolving commercial real estate landscape. 

Trends for Industrial Tenants 

It is critical for tenants to stay on top of trends that are influencing their industry. Not only can you capitalize on pockets of growth, but you can understand how your existing portfolio is positioned for success.

By adapting to technological advancements, embracing sustainability initiatives, and leveraging the expanding e-commerce landscape, tenants can optimize their operations and maximize their competitive advantage. Stay ahead of the curve, seize the opportunities, and secure a prosperous future in the dynamic world of warehouse space.

By continuously staying informed about the latest trends and developments in the commercial real estate industry, you can position yourself as a knowledgeable and forward-thinking tenant. And to ensure you never miss out on the latest tips, tricks, and trends that can benefit your business, subscribe to our blog. Our blog is a valuable resource where you'll find insightful articles, expert advice, and industry updates to help you navigate the ever-changing landscape of commercial real estate. So, don't get left behind and subscribe to stay on top!