Is the industrial party over?

Meanwhile, net absorption both nationally and locally has been coming back to earth. From 2005 through 2015, the U.S. market averaged net absorption of 165 MSF annually. From 2016 through 2020, that total climbed to 255 MSF. In 2021 the market recorded 516 MSF of positive net absorption. Last year, it posted 401 MSF of net absorption.

The Sacramento market averaged 1.2 MSF of net absorption annually from 2005 through 2015. From 2016 through 2020, it averaged 2.5 MSF. Locally, we recorded a whopping 7.5 MSF of net absorption in 2021 and an additional 2.5 MSF of positive gains last year. This number came in at 504,000 SF during the first quarter of the year, which—assuming the same pace through the remainder of 2023—would place us in the 2.0 MSF range for growth. But we also think it a fair assumption that given the region’s shortage of available supply in recent years, that most of the new speculative construction in the pipeline will move briskly even if overall demand levels are coming back to earth. Clearly big picture economic fundamentals will determine this, but even with headwinds, we anticipate what would—by any historical measure—be another strong year for industrial growth ahead.

There is one factor, however, where we do see growth in greater question and that is rents. The current average asking rent for industrial space in the region is $0.80 per square foot (PSF) on a monthly triple net basis. While inflationary pressures and rising construction costs have been part of the mix over the past 18 months, this trend has been playing out locally for much longer. The average asking rent for industrial space in the Sacramento region has doubled over the past decade (it stood at $0.40 PSF in Q1 2013). This metric is up 11.1% over the past twelve months. We anticipate rent growth to slow over the next year from recent levels that simply are not sustainable in the long run. Slightly slower demand, rising vacancy rates and a steady pipeline of new product will help to move the market a little closer to equilibrium, though conditions will still considerably favor landlords in the near-term.

Is the industrial market slowing? Yes, but it remains the strongest of all commercial real estate sectors in terms of demand. The market may be downshifting, but it is going from white hot to hot.