A record 508 million square feet of industrial space was delivered nationwide in 2023, but the increase in debt costs resulted in a slowdown in new project starts.
Developers broke ground on 282.4 million square feet of industrial space in 2023, a decline from 598 million square feet in 2022, according to CommercialEdge's National Industrial Report released Dec. 27.
Dallas and Phoenix continued to lead the nation in new industrial development, accounting for 17% of all starts nationwide. Dallas saw 26 million square feet of starts, and Phoenix had 22.6 million. That's still down from last year when 49 million square feet broke ground in Dallas and 41.3 million broke ground in Phoenix.
The rise in debt costs also contributed to a decline in transaction volume, which fell to $44.4 billion - well below the $19 billion in 2021 and $101.2 billion in 2022. In 18 of the top 30 markets, sales volume was less than half of what it was during the same period last year.
Only the San Francisco Bay Area saw more sales in 2023, with $2.33 billion in deals compared to $1.9 billion recorded last year. Sales volume in Atlanta plunged 56%, while sales prices dropped 7% despite being a hot industrial market in recent years.
Although 2023 saw its share of challenges, industrial real estate saw some positive trends, including a 6% increase over last year of the average sale price per square foot to $130. National industrial in-place rents rose 7.7% year over year, averaging $7.60 per square foot.
Port activity returned to normal, with the Ports of Los Angeles and Long Beach handling 17% fewer containers through October 2023 than they had through the same period last year. Among the reasons contributing to the decline are consumer preferences shifting away from goods toward services after the pandemic ended and inflation eating away at their discretionary income.
"As our often-cited call of normalization came to fruition in 2023, we are watching the absorption of new product and the rent growth of expired leases heading into 2024," CommercialEdge Director Peter Kolaczynski said. "While the outlook remains positive, a meaningful drop in lease spread or the inability to lease up new deliveries would begin to elicit more concerns."