Industrial fundamentals softened in Q2 as occupiers continue to take a “wait and see” approach in their decision-making process. Absorption was even with the previous quarter, bringing the year-to-date absorption figure to 55.4 million s.f. For context, absorption through H1 2023 was 120.3 million s.f. Absorption figures were strongest in the primary markets of Houston, Phoenix, Dallas-Fort Worth, Chicago, and Atlanta, which tallied 18.4 million s.f. of positive net absorption. However, some markets posted negative absorption figures for reasons including consolidation of operations and lease expirations. Of the 113.3 million s.f. delivered, nearly 70% was vacant, causing the vacancy rate to increase to 6.6%. Rental rate growth was positive, passing the $10.00 per s.f. threshold for the first time and landing at $10.03 per s.f., a 5.8% year-over-year increase. Furthermore, eight markets saw their asking rates contract by at least 3% this quarter. Sublease availability slowed significantly, with only 10 million s.f. of new sublease space being brought online, while vacant sublease space saw only 2 million s.f. of space vacated. Sublease space is most concentrated in the major metro markets, including the Inland Empire, Dallas-Fort Worth, Atlanta, Los Angeles, and Eastern & Central Pennsylvania. Despite sublease availability space being elevated by 75.1% year-over-year, it is important to note that this figure accounts for only 1.1% of all availability, and the majority of sublease space is being marketed for short-term use.

Businesses exercise caution amid economic uncertainty and consumer spending fluctuations

Overall leasing activity was down in Q2 as businesses remained cautious due to economic uncertainty and fluctuating consumer spending. In Q2, 112.6 million s.f. of industrial space was leased, with 59.1% of that figure attributed to new leases. Furthermore, of those new leases, 45% were in Class A assets, demonstrating the ongoing flight to quality and demand for newer facilities. However, users up for renewals are largely opting to stay in place as industrial rents continue to climb. Moving forward into H2 2024, leasing momentum is expected to fluctuate, though evolving supply chain requirements from manufacturers, e-commerce, and other users will continue to drive demand for 3PL companies. Many companies are drawn to 3PLs for their scalability, flexibility, expertise, and global network to streamline extensive logistical operations. The top industries for leasing in Q2 were 3PL, construction materials and building fixtures, logistics and distribution, food and beverage, and auto parts & tires. The communications and tech sector has sustained a 117.2% year-over-year increase in average lease size, in part from the boom of data center construction, in which large tech companies have begun leasing industrial space to support those operations. Economic uncertainty and shaky retail sales have translated to the average lease size of a traditional retailer shrinking by 57% year-over-year. As consumer and occupier needs continue to evolve, activities related to sustainable solutions, government support, advancing technology, reshoring, and consumer demands will help fuel growth in the manufacturing, automotive and, energy and utilities sectors in the long-term.

Development pipeline wanes as 77% of all industrial assets under construction set to deliver by end of year

The pace of new deliveries ticked up slightly from Q1, with 113.3 million s.f. being delivered. This brought the year-to-date total to 222.6 million s.f., marking a 35% decrease from the previous quarter. Phoenix, The Inland Empire, Dallas-Fort Worth, Atlanta, and New Jersey combined accounted for 37.1% of all new deliveries. Phoenix and Savannah both topped Dallas-Fort Worth for the largest development pipelines in Q2, with Phoenix boasting 32.5 million s.f. under construction and Savannah having 30.3 million s.f. under construction. Nationally, the total amount of industrial product under construction has decreased 46.7% year-over-year, with 312.9 million s.f. being underway. Additionally, we estimate that 77% of this total figure will be deliver by the end of 2024, while 2025 deliveries are currently estimated at roughly 85 million s.f. Preleasing of under-construction assets has increased by 36.7% year-over-year. Of the 43.1% of preleased buildings under construction, mega-box sites measuring over 1 million s.f. have the strongest preleasing rates at 75.4%. For context, there are currently 49 buildings under construction in this size tranche. The 100,000 s.f. to 250,000 s.f. size segment has the most buildings under construction at nearly 400, so while a preleasing rate of 22.7% might seem sluggish, demand and leasing activity within this size segment indicates otherwise. It is also worth noting that owner-user and build-to-suit projects make up nearly one-third of all products under construction. With many occupiers experiencing sticker shock at current renewal rates, some have opted to purchase the speculative-built building they occupy. The Chicago market has seen four notable such transactions, with buyers representing varied industries, including a food and beverage distributor and a filter and injection molding distributor, as well as a national logistics and distribution user. In New Jersey, Abaline, a supply distributor, purchased its 311,040 s.f. speculative warehouse for $65.3 million.

Diverse geographies for markets with remaining mega-box availabilities

With mega-box buildings having the strongest preleasing rates in both newly delivered assets and current buildings under construction, users seeking a large swath of space have options in differing geographies. Leasing of spaces over 1 million s.f. in the first half of 2024 has outpaced that in the second half of 2023 by over 6 million s.f. Furthermore, six of these mega-box transactions were in The Inland Empire market. While these large transactions certainly help bolster leasing figures, the majority of industrial occupiers are concentrated on “rightsizing” their spaces leased. Of all space leased in Q2, 58.2% of that figure were leases measuring less than 250,000 s.f. Users currently have more options available and thus don’t feel as rushed to lease too much space too quickly, rather opting to grow into additional space as needed. As it relates to new construction, many developers are opting to have large buildings be easily demised instead of building for one tenant.

Industrial transactions volume declines level off; investor conviction rises since start of 2024

Transaction volume declines across commercial real estate are leveling off, and YTD 2024 has seen considerable green shoots as it relates to investment sentiment and depth of bidder pools. In addition, the appetite for larger transactions has been improving. The CMBS SASB market has been very active; industrial issuance in the first half of 2024 is up fourfold compared to full-year 2023. Cap rates for in-favor property sectors like industrial have marked some compression versus late last year. Investor interest continues to be strong for shallow bay and value-add assets, and there is also an increase in activity around core and core-plus transactions. Furthermore, there’s an increase in interest in land sites for developers to position themselves for when development economics improve.

Power capacity top concern for industrial occupiers over long-term

Absorption will continue to fluctuate for the duration of the year; however, due to several large-scale deliveries and leases commencing, industrial absorption figures could see a slight push at the end of 2024. With the ongoing flight to quality, owners of Class B and C products will likely work to update older facilities as the complex needs of automation and technology advance. New groundbreakings have slowed 49% year-over-year but did increase by 17.3 million s.f. from the previous quarter. Power capacity remains the top consideration of tenants looking at new developments. To help draw tenants to speculative sites, some proactive speculative warehouse developers are taking on the task of upgrading the power supply and capacity at the onset of construction. Given that power capacity is one of the core pillars of the manufacturing industry, markets with readily available power will benefit the most. Furthermore, as manufacturing projects are expected to ramp up in the coming years, proximity to mega-sites will draw suppliers, helping to sustain demand.

 JLL Capital Markets has completed the nearly $50 million sale of a 12-property net lease retail portfolio comprising more than 94,000 square feet across three states and five major metropolitan markets.

JLL represented the seller, a South Florida-based family office, and procured the buyer, Orion Real Estate Group.

The portfolio consists of 11 single-tenant and one two-tenant properties, including bank branches, a fitness center, pharmacy, urgent care facility and quick service restaurant. The portfolio contains 6.5 years of weighted average remaining lease term and nearly 70% of the tenants hold investment grade credit ratings.

The properties are positioned in major metropolitan areas throughout Florida, Texas and Illinois.

JLL’s Investment Sales and Advisory team representing the seller was led by Senior Managing Director Alex Sharrin, Senior Director Jeff Cicurel and Associates Eric Osika and Noel O’Donnell.

Coldwell Banker Commercial First Equity signed a lease for 51,848 square feet of Class-A office space at 701 S. Taylor Suites in downtown Amarillo, Texas.

The office building is easily accessible from I-40 and I-27. 

Rachel Shreffler of Coldwell Banker Commercial First Equity represented the lessor, 1908 Properties, LLC. While the tenant is undisclosed, Shreffler said the intended use is office space for approximately 330 employees. The lease includes suites L118, L119, L121, L122, 350, 400, 430, 460, 470 and 480.

The United States is experiencing an affordable housing crisis.

The U.S. needs 5 million more homes than it currently has. And even those who have homes are struggling, as 40% of renters are cost-burdened, while housing prices are rising faster than wage growth in 80% of U.S. markets, according to the Kenan Institute of Private Enterprise.

People may disagree about what the path forward looks like, but any path forward must include cooperation. The federal government, state governments, local jurisdictions, the private sector, not-for- profit organizations – there is plenty of opportunity to work together to manage the housing crisis. Yet, there is no one-size-fits-all solution. Collaboration between the housing industry and all levels of government remains the key to determining a tailored solution to the housing emergency facing each individual community.

Examining a critical connection

Understanding the relationship between the workforce housing crisis and local economic development needs is an important first step toward ultimately developing a plan, policies and solutions to bridge the gap and providing housing options for our workforce.

If communities do not have sufficient housing for their workforce, there will be an ongoing challenge to achieve economic growth.

At a high level, cities need affordable, available housing to attract workers to their community in the first place. A city can have hundreds of schools, daycares, entertainment complexes and restaurants, but if the workers have nowhere to live nearby, then there will always be a workforce shortage.

The workforce housing crisis, as we see it.

Baker Tilly has the advantage of being able to view the workforce housing crisis from two distinct perspectives: our public sector practice and our housing development practice. Our specialized teams understand and empathize with communities that are rapidly trying to come up with answers amidst unique situations, seeking to digest and manage all the complexities related to housing development, including site reuse and redevelopment for housing, public sector programs and incentives, project financing, construction risk management and every aspect of real estate.

The intersection of these firm specializations viewed through a workforce housing crisis lens can employ solutions to create a road map for long-term success.

Understanding the specific issues within your community:

1. Recognize that housing is part of economic development. While most people in the economic development industry are focused on growth strategies and re-development planning, it is common for people to lose sight of the housing element. Approaches for community growth in terms of economic and redevelopment strategies and incentives programs can lead the path forward.
2. Engage with your employers. An underrated strategy for creating jobs in your community is to organize an open forum that encourages local businesses to talk about what they need.

• Study the housing market. A thorough housing assessment (including a gap analysis) should help further highlight the current state of the region while determining what the community needs to do from a housing standpoint.
• Establish a housing taskforce. This taskforce should include representatives from both the public and private sector and not-for-profit organizations. Together, the taskforce should form an action plan with specific strategies that the local government and housing developers can take to turn the community’s issues into action.
• Determine the funding options. Configuring your ability to leverage different funding options is like solving a puzzle. You must get creative and examine every alternative to maximize your funding options.
• Prepare the developers for success. Along with clear processes, communities can also set the stage for workforce housing development through updated zoning codes and considering ways in which higher-density housing and other factors play a role in increasing development.

Communication-based solutions

1. Community awareness. Housing professionals should sound the alarms throughout the community, making it clear that a lack of workforce housing will ultimately result in fewer jobs and less growth in the community.
2. Strategic networking. Staying connected with economic developers is a necessary step. If you make a concerted effort to bring them into your community, you’ll quickly find that economic developers have many similar interests.
3. Connect with statewide housing agencies. Statewide housing agencies are a key resource for connecting the state and local governments with the economic developers in the region.

Next steps

These are basic ideas of how to get started, but obviously the workforce housing dilemma isn’t going to be solved with easy answers or simple steps. Connect with our specialized teams If you would like to discuss tailored solutions for your community and address your workforce housing challenges.

Donald Bernards is principal in the real estate group of Baker Tilly, working from the company’s Madison, Wisconsin, office. Jolena Presti is managing director with Baker Tilly’s public sector advisory practice and works from the company’s Milwaukee office.

Marcus & Millichap negotiated the sale of Eason Storage, a 229-unit self-storage facility in Canton, Texas.

Danny Cunningham and Brandon Karr, investment specialists in Marcus & Millichap’s Fort Worth office and leaders of the Karr-Cunningham Storage Team, exclusively represented the local Canton, Texas, owner/operators.

The buyer, a Texas-based storage group with more than 30 facilities, was also secured by Cunningham and Karr.

Eason Storage is a 39,265 rentable-square-foot storage facility resting on two adjacent parcels totaling approximately 4.78 acres, located at 17546 FM 17. The 229-unit facility was built in 2000 and later expanded in 2017. It comprises 20 climate-controlled units,208 non-climate drive-up units, and one rental house.

Dallas-based Provident Industrial closed the disposition of Buildings I & II of Gateway Logistics Park in El Paso, Texas, to public global real estate owner/operator EQT Exeter.

The sale includes Building I and Building II totaling 576,365 square feet of the three-building industrial park located on Ashtabula Avenue in El Paso.

Construction on buildings I and II was completed in November 2023 and April 2024, respectively, and construction for building III will be completed in August 2024.

Building I, located at 12221 Ashtabula Ave., is 308,270 square feet with 32′ clear heights. It houses 93 trailer spaces, 69 dock doors, 2 ramp doors, and 54′ x 50′ column spacing.

Building II, located at 12228 Ashtabula Ave., is 268,095 square feet with 32′ clear heights. This building has 69 trailer space, 56 dock doors, 2 ramp doors, and 54′ x 50′ column spacing.

Both buildings feature Loop 375 frontage and are 7.5 miles north of the Ysleta-Zaragoza Port of Entry in Juarez, Mexico. Construction of both phases was completed by the general contractor, Harvey-Cleary. Case Van Lare and Chris Martin from Provident led the development.