Why is the U.S. industrial vacancy rate rising? Research from Colliers suggests a simple reason: The number of new industrial facilities delivered by developers continues to outpace the demand from tenants for new warehouse and manufacturing space.

That’s the takeaway from Colliers’ first-quarter national U.S. industrial report released last month. But there is good news in the report, too. Colliers says that the vacancy increases should stop as new industrial construction slows, something that is already happening.

In its report, Colliers said that industrial construction completions outstripped tenant demand for the seventh quarter in a row in the first quarter of this year. That pushed the U.S. average industrial vacancy rate up 50 basis points to 6.1% during the quarter, the highest that figure has been since early 2015.

Industrial vacancy rates increased in 61 of the 77 markets tracked by Colliers between January and March.

In another sign that the industrial market is slowing, Colliers reported that net industrial absorption during the first quarter came in at only 28 million square feet. That’s the lowest this figure has been in more than a decade and is 65% lower than the 81 million square feet absorbed in the first quarter of 2023.

Developers delivered more than 120 million square feet of new industrial space during the first quarter. That is down from more than 154 million square feet in the fourth quarter of 2023 and 140 million square feet in the first quarter of 2023.

The more interesting number, though, is the amount of industrial space under construction. Colliers said that developers had more than 384 million square feet of new industrial properties under construction in the first quarter. That’s a large number, but it’s lower than the more than 447 million square feet under construction in the fourth quarter of last year and significantly less than the 690 million square feet being built in the first quarter of 2023.

Those construction numbers are a sign that developers are pulling back in the amount of new industrial space that they are adding across the country. As new industrial construction slows, tenants might struggle to find the space they need. That should increase demand and result in vacancy rates in this sector dropping again.

JCB on June 4 began work on a $500 million factory in San Antonio, Texas, the biggest investment in the company’s history.

An official groundbreaking ceremony at the site marked the beginning of construction, where The Hon. Alice Bamford, the daughter of company Chairman Anthony Bamford, turned the first shovelful of dirt on the property.

Work on the 720,000 sq. ft. (67,000m²) factory is now under way on the 400-acre site. It will be the company’s second largest plant, rivalled only by JCB’s world headquarters in Rocester, Staffordshire, England, and create 1,500 new jobs over five years.

The factory will make Loadall telescopic handlers and aerial access equipment, with production scheduled to start in 2026. The factory will also have the capacity to expand and build other products in the future.

Chairman Lord Bamford said: “Construction equipment manufacturers sell more than 300,000 machines every year in North America, making it the single largest market in the world. JCB has been growing its share of this important market steadily over the past few years and the time is now right to invest in our manufacturing capacity in North America, where we already have one factory.”

“JCB really has come a considerable way since we sold our first machine here 60 years ago and it gives me immense pleasure to see how our business has grown in North America. Today really is a milestone day in the history of our family company,” Bamford says.

In good news for the commercial real estate market, 80% of U.S.-based CRE professionals said in a recent survey that they expect to buy or sell property within the next six months.

That would be a boon to the commercial real estate industry, which is still waiting for owners and investors to begin buying and selling industrial facilities, office buildings and retail centers in higher numbers once again.

The positive news came from Altus Group‘s second quarter 2024 CRE Industry Conditions & Sentiment Survey released on June 12. The quarterly survey contains feedback from 560 commercial real estate professionals representing more than 97 firms in the United States and Canada. Altus Group surveyed these professionals from March 25 to April 29.

One of the bigger takeaways from this report is the willingness among respondents to make real estate deals. Commercial real estate sales have been slow since the Federal Reserve Board first began tweaking its benchmark interest rate. Now that the Fed has said it will no longer increase this rate, the hope is that investors and owners will begin selling and buying commercial real estate in larger numbers.

With 80% of U.S. survey respondents saying that they do plan to buy or sell in the next six months, it does look like the Fed’s decision to no longer increase its benchmark rate will spur more sales activity in the commercial real estate sector.

The survey found, too, that 91% of the largest firms said that they intend to transact during the next six months. That is up from 83% in the first quarter of 2024.

And what asset classes will investors buy? Four the fourth consecutive quarter, respondents told Altus Group that industrial and multifamily properties are expected to be the best performers during the next 12 months. U.S. respondents also said that retail is expected to be attractive, too.

Not surprisingly, respondents cited office as the expected worst performer during the next 12 months.

This willingness to make deals doesn’t mean that U.S. commercial real estate professionals aren’t worried about the country’s economy. The number of U.S. respondents who told Altus Group that a recession is “very likely” or “somewhat likely” in the next six months increased by 7 percentage points from the previous quarter.

This means that the majority of respondents — 70% — say that a recession is either “somewhat likely” or “somewhat unlikely” in the next six months. This indicates plenty of uncertainty.

In other results from Altus’ study, 49% of respondents said that they expect interest rates to remain stable during the next 12 months. Surprisingly, 25% of respondents said that they expected interest rates to rise during the next 12 months. That is up 16 percentage points when compared to the first quarter of this year.

Altus Group reported that 26% of respondents expected interest rates to fall by 20 percentage points in the next year.

More than a third of respondents — 37% — said that they expected increased availability of capital in the next year, a jump of nine percentage points from the last quarter. However, 40% of respondents said that they expected the cost of capital to increase in the next 12 months. That figure is up 12 percentage points from the first quarter of 2024.

And when it comes to revenue growth? Respondents to Altus Group’s survey were generally optimistic.

A total of 62% of survey participants said that they expected revenue growth to be stable during the next 12 months, while 19% expect revenue growth to increase. That latest figure represents a modest increase of two percentage points from the first quarter of the year.

Hanley Investment Group Real Estate Advisors facilitated the acquisition of two single-tenant net-leased properties occupied by Brakes Plus in North Richland Hills and Killeen, Texas, in separate transactions.

Hanley Investment Group’s Vice President Garrett Wood represented the buyer, a Florida-based private 1031 exchange investor.

The first Brakes Plus-occupied property is located at 8612 Precinct Line Road in North Richland Hills, part of the Fort Worth-Dallas metro area, near the signalized intersection of Davis Boulevard and Precinct Line Road (with 44,500 vehicles per day).

Built in 2022, the 4,956-square-foot Brakes Plus sits on a 1.02-acre parcel adjacent to Super Target and a Walmart Supercenter, with over 18 years remaining on the absolute triple-net lease, which has a corporate guarantee by Mavis Tire Express Services Corp. Other national tenants within a mile of the property include Kroger, Walgreens, Aldi, Starbucks, McDonald’s Chick-fil-A, Dutch Bros and Bank of America. The seller, a Colorado-based private investor, was represented by Marcus & Millichap’s Drew Isaac, Brian Bailey and Tim Speck.

The second Brakes Plus-occupied property is situated in Central Texas at 3301 West Stan Schlueter Loop in Killeen, which sees nearly 30,000 vehicles per day. Killeen is home to Fort Hood, now known as Fort Cavazos, one of the largest military installations in the world.

Built in 2023 on a 1.04-acre parcel, the 4,900-square-foot Brakes Plus has nearly 15 years remaining on its new absolute triple-net lease, which has a corporate guarantee by Mavis Tire Express Services Corp. The property is located near Walmart, HEB grocery store, Dollar General and Arby’s. Recently constructed sites nearby include Mister Car Wash, CVS, Popshelf, Starbucks, Sherwin-Williams and Taco Casa.

The seller, a Los Angeles-based private investor, was represented by Sands Investment Group’s Matt Montagne, Maxwell Watson and Tyler Ellinger.

JLL Capital Markets arranged the sale of Sage Spring Senior Living, a senior living community in San Marcos, Texas.

JLL represented the seller, a joint venture between Bow River Capital and Investcor, and procured the buyer, Inspired Healthcare Capital.

Sage Spring Senior Living is located in San Marcos, midway between San Antonio and Austin. The 90-unit assisted living and memory care community opened in December 2020 and was stabilized at time of sale.

The JLL Capital Markets Investment Sales and Advisory team was led by Senior Managing Directors Jay Wagner, Rick Swartz and Aaron Rosenzweig and Director Dan Baker.

A short-term interest rate cut may be on the horizon—but that doesn’t mean we are returning to yesterday’s persistent low rates and high valuations. The year ahead will require new thinking and reformulating the math as we structure financing for the next wave of commercial real estate investment. What CRE needs now is a significant recalibration—a Great Reset.

The first step: shifting how we think about interest rates. Sitting around and waiting for long-term interest rates to return to near-zero is overly optimistic. Even if the Federal Reserve achieves its inflation target of 2%, the federal funds rate will settle in at around 2% and a normal, upwardly sloping yield curve will result in a 5-year Treasury rate of approximately 3% and a 10-year Treasury rate around 4%.

With long-term Treasury rates at those levels, financing for stabilized properties will be in the 5% to 7% range—a far cry from the 3% to 4.5% range we saw just a few years ago. Unless real estate investors can withstand negative leverage for a short time because of increasing net operating income (NOI), most investors can expect to price prime properties using capitalization rates in the 6% to 7% range or higher. Moving from a 4% cap rate to a 6% cap rate is a 33% decline in a property’s value, assuming NOI is stable.

That brings us to step two of the Great Reset: changes to NOI. While there has been significant rental rate growth—especially for apartments in certain markets and industrial properties nationwide—in many instances, expenses have increased as fast or faster than rental rates. Major operating expenses like real estate taxes, insurance rates, personnel costs and repair and maintenance costs have all had significant increases. The increase in expenses outpacing the increase in rents also creates a decrease in value to all property types.

Additionally, there is the coming wave of loan maturities to consider. Twenty percent of the $4.7 trillion in outstanding commercial mortgages will mature in 2024, according to the Mortgage Bankers Association, with nearly $2 trillion coming due by the end of 2026. About one-third of the debt coming due in 2024 is a result of loan extensions from 2023 by borrowers and lenders that were hoping for rates to come down in 2024. Assuming lenders do not extend the loans into the future, this wave of maturities will bring many properties to market at prices lower than the owners paid for them in the past.

Lenders whose underwriting factored in favorable debt service coverage ratios and traditional debt yield tests will likely weather the interest-rate storm without major losses in the CRE sector due to the low leverage that underwriting based on debt yield required. Those disciplined lenders will be able to remain active in the market and stand to gain considerably as the Great Reset occurs. The moment is especially ripe for those ready to lend in sectors like industrial and multifamily real estate, where borrowers who secured financing during the low-interest-rate window between 2017 and 2020 now face the need to restructure their debt.

How can investors and lenders alike stay ahead of the curve? Here’s a look at the year ahead.

Where we are—and where we are headed

Many “pretend and extend” lenders have long been awaiting a drop in interest rates that will likely not happen. The aftermath of the global financial crisis of 2008 created a misplaced sense of permanence around the low rates that followed. Many developers, investors and debt providers misinterpreted a temporary phase (albeit a temporary phase that lasted a decade) as the new normal. The reality is that interest rates in the 6% to 7% range, or far higher, were the norm in previous decades. To expect extremely low rates indefinitely was simply unrealistic.

Sellers have also been slow to adjust. Now, the disconnect between seller expectations and buyer willingness has propelled billions into funds aimed at acquiring distressed debt or assets. The pressing question remains: What will cause the bid-ask spread to narrow enough for transactions to take place? Borrowers that have locked in low, fixed-rate financing have no reason to sell into this environment. However, as loans mature and a wave of maturities occurs over the next year or so_, these borrowers will be faced with the decision to refinance at much higher rates—assuming NOI growth has kept up enough to overcome the increase in interest rates—or they will be forced to sell or infuse significant equity into projects to replace the existing debt with lower leverage.

Different product types and geographies deliver different opportunities

Despite current challenges, the Great Reset will offer opportunities to both investors with dry powder and lenders with the capacity and willingness to lend into the CRE market. Some sectors, like new industrial and multifamily development, have cooled in recent months as the wave of new supply has overwhelmed the positive demographics of many multifamily markets (such as in the Sun Belt), and the satiation of industrial demand in the aftermath of pandemic-era supply chain disruptions.

Long term, both trends will enable unique opportunities for strategic investments amid market excess and the rise of office adaptive reuse. When an apartment community is not performing to pro forma, for example, a buyer can potentially acquire the property with less leverage and more equity, then refinance when lower rates come along.

The next phase of the Great Reset

Advancing the market requires a shift in collective thinking. After all, one investor’s bad news may be another investor’s golden opportunity. A well-performing building, such as a multifamily property within an in-fill market with high barriers to entry might simply have the wrong debt structure for the times. With a forced sale due to a maturing, low-rate loan, a new ownership group can invest at a reset basis. This creates opportunities for lenders and enables projects to be revived with a reinvented capital stack. Fresh capital and a willingness to invest and lend will be critical in successfully navigating the Great Reset.