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Despite a Downturn, the US Industrial Real Estate Sector is Moving Positively  

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Despite a Downturn, the US Industrial Real Estate Sector is Moving Positively  

Post-pandemic the industrial real-estate sector suffered a down-turn. During the pandemic, the e-commerce boom that fueled deliveries from tomatoes and cereal to iPads and shoes boosted demand for warehouse space. Once the world opened up again, however, people’s normal shopping patterns commenced leaving the heydays of home orders behind. Yet, despite some gloomy predictions, industrial real-estate is having a rather prosperous year, historically speaking. 

In the current climate of high interest rates, weak freight demand, and a shift in consumer spending, third-party logistics providers, e-commerce retailers, and similar firms are still leasing fewer new warehouses. Yet, the industrial real-estate market has been surprisingly resilient. During the 2020-2022 pandemic years, the warehouse vacancy rate (nationwide) was down to roughly 3%. Some regions such as Southern California were completely full. Compared to 2019, however, 2023 will likely end more favorably. 

Approximately 205 million square feet of warehouse space was leased by logistics operators in the second quarter of 2023. This was less than the same period in 2022 (235 million) but eclipsed the second quarter of 2019 – 135 million square feet. Firms are still seeking to expand but 2021 and 2022 are clouding expectations. The sector will not return to the pandemic heights, but companies are actively seeking to offset the supply-chain disruptions that were common during the pandemic by moving inventory closer to their customers. 

During the pandemic, it was common for retailers to run out of stock. The inventory-to-sales ratio hovered in the 1.25 level in 2019, popped upwards for a brief moment in early 2020, and then nosedived to a low of 1.05 by early 2021. It has slowly climbed back and is currently in the 1.20 range. Sam’s Club,, and Target have all been opening additional logistics facilities with an eye on speeding their e-commerce deliveries. Additional demand has also been spurred on by companies that can take advantage of electric, vehicle-related subsidies and require warehouse space for batteries, semiconductors, and related parts. 

Dallas/Fort Worth, Phoenix, Savannah, Chicago, and Atlanta had the most new industrial space under construction in the second quarter of 2023. West Coast port delays during the pandemic shifted importers to re-route shipments towards the East Coast and Gulf Coast. Warehouse rents are still rising even as leasing has decelerated which indicates space overall is tight. But all signals point to 2023 being a good year for industrial real-estate albeit coming off some banner years that might not ever be achievable under normal circumstances.