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2/02/24
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This update provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
With the Inland Empire’s industrial market concluding 2023 at a record-breaking pace—adding an unprecedented 14.8 msf of completed construction in the fourth quarter, the largest quarterly delivery in its history, and a total of 28.2 msf completed for the year—this surge in the supply of new space may have implications for industrial building sales.
The growth in deal velocity, a key indicator of buyer interest, revealed a year-to-date decline of 31.8% in sales volume on a square foot basis compared to last year, the lowest since 2009 during the Great Recession. Despite this, the average price per square foot saw an increase of 7.2% from 2022, while quarter-over-quarter, the average sale price remained flat.
In the Inland Empire, sales dollar volume dropped by 43.7% compared to a year ago, as the average cap rate for industrial properties increased by 80 basis points in 2023 compared to the previous year, reaching 5.7%. While pricing values have changed, to put it into context, this increase is noteworthy, especially when considering that cap rates were at 7.7% in 2010 during the Great Recession.
Lower economic growth has contributed to a slowdown in industrial building sales, with elevated prices and interest rates playing a significant role. Richard Lee, SIOR, NAI Capital Commercial Executive Vice President of the Investment Services Group in the Ontario office, pointed out, "Investors are now pushing for higher cap rates due to the increased cost of capital required to justify their purchases. After years of historically low cap rates, this represents a new reality for sellers of investment real estate.”
He further emphasized his belief that low sales volume can be attributed to a few factors. Rising cap rates are putting downward pressure on purchase prices, causing owners to hold off on selling at the moment. On the owner/user side, there simply isn't a large inventory of properties for sale.
Richard noted, "The properties that are for sale still command a pretty large number and the high interest rates makes it tough for buyers to afford which shrinks the number of buyers."
As we look ahead to 2024, the effort to preserve property values, coupled with the growing supply of industrial space, will unfold, leading to an increase in industrial buildings available for sale. The market will grapple with challenges arising from elevated interest rates, a slowing economy, and waning demand—factors that will persistently exert pressure on pricing in the coming year.
This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial
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