Industrial and Multifamily Sectors Face Challenges, Slowdown

After steady increases, demand for industrial and multifamily space appears to be slowing significantly. Lee & Associates’ 2023 Q3 North America Market Report shows US industrial net growth down 68% in comparative third quarters. The multifamily sector also felt a sharp increase in vacancies and the lowest rent growth on record.

Jeff Rinkov, CEO of the broker-owned real estate services firm, points to challenging economic times, supply chain recovery and cautious corporate behavior as key factors.


Industrial Space Remains Positive, Net Growth Down

“The economic environment, including interest rate increases, fluctuations in federal policy, and some credit tightening, is causing corporate America to respond slower and more measured in capital expenditures and their commitments to new and expanded space,” Rinkov said.

In addition to US net growth in industrial space decreasing from 94 million square feet to 29.9 million, year-to-date net absorption is 110.2 million square feet, down 62% from the same period, according to the report. Tenant expansion is at the slowest pace since 2012 and comes as a quarterly record of new inventory is set for delivery.

The report also found that construction starts have been dropping since last fall, with anxious developers concerned that higher interest rates may cause values of newly delivered projects to fall below replacement costs.

“I still think we will see continued growth within the industrial sector,” said Rinkov, and notes that the development pattern is in response to consumers pivoting more towards online shopping during and after the COVID pandemic. The pandemic also created significant supply chain issues that elongated the development cycle, he added.

Rinkov noted that port-centric markets continue to thrive with higher rental rates and outsized demand and won’t be as affected by development. The report found that Tampa, Jacksonville, Milwaukee and Detroit “bucked the national trend” with tightening availability rates year-to-date in 2023.


Multifamily Development Outpaces Demand

According to Lee & Associates, the surge of new apartments in the development pipeline continues to outpace demand, resulting in a sharp increase in vacancies (from 4.6% to 7% since mid-2021), and the lowest rent growth on record (10.9% to 0.9% over the last six quarters).

“Many cities experienced very high growth rates due to large migrations of people for jobs or COVID policies,” said Rinkov. He noted that while developers reacted quickly, absorption will still take more time.

Lee & Associates reported that more than one million multifamily units are under construction in the US, the most since the early 1970s. However, construction starts have fallen dramatically this year, a result of “higher interest rates, lower rents and overbuilding in several markets” it notes. Fewer than 160,000 units are forecast for completion in 2026 and an estimated 194,000 in 2027, compared to 440,000 and nearly 335,000 units projected in 2024 and 2025, respectively.


Uncertain Times, Optimism for the Future

Rinkov remains optimistic about the strength and resiliency of both sectors and expects them to settle and normalize.

“While we are seeing quite a bit of industrial product coming online right now, we will eventually absorb all of the space,” Rinkov said. “And multifamily markets, with higher vacancies because of construction deliveries, should resolve the issue in 12 to 18 months.”

Source: Lynn Giles | ALM Globest | November 28, 2023