The 2023 Industrial Real Estate Landscape

The industrial real estate landscape in 2023 presents a unique set of challenges and opportunities for investors, developers, landlords and tenants alike. Limited inventory, expensive financing, and scarce vacant land, are the primary market drivers which are shaping this market sector. In this publication, we explore these key factors, how they are shaping the industrial real estate market and their implications.

Limited Inventory
Finding new "turn-key" industrial properties has become increasingly difficult due to limited inventory. The supply of ready-to-use industrial spaces falls short of the growing demand, creating a competitive environment for prospective buyers.

As a result, businesses searching for suitable industrial properties must be prepared to explore alternative options or consider leasing arrangements.

Expensive Financing
Recent financing trends have made it challenging to underwrite deals that pencil-out in the industrial real estate market. Higher interest rates and stricter lending criteria have contributed to more expensive financing options.

Investors and developers need to carefully evaluate the financial feasibility of projects, considering the increased costs and potential impact on returns.

Scarce Vacant Land
The availability of vacant land suitable for industrial development projects is scarce. This scarcity limits the opportunities for businesses looking to expand or establish their presence in desirable locations.

As a result, developers face the challenge of identifying and securing appropriately sized plots of land for industrial projects, further intensifying the competitive nature of the market.

Favoring Landlords
Due to limited inventory and scarce vacant land, the scales have further tipped in favor of landlords in the industrial real estate market. With fewer options available for purchase or development, landlords hold a stronger bargaining position. This trend has led to increased rental rates and lease terms that are more favorable to landlords, highlighting the importance of strategic negotiations for prospective tenants.

Demand for Tech Infrastructure
Looking ahead, certain properties stand to benefit from today’s technology requirements. Properties with proximity to fiber-optic infrastructure and properties that offer on-site power production are likely to attract the highest rents from high caliber tenants, due to the scarcity of buildings with these features.

Data centers and automated distribution companies, for example, require high bandwidth connectivity and reliable, inexpensive power to achieve their minimum operational standards or to meet their ESG goals.

These technology demands favor properties which are already proximate to existing communication infrastructure or those which can retrofit these technologies into the existing portfolio. This technology demand creates opportunities for industrial real estate developers to cater to specialized needs and create tech-ready spaces for tenants who are happy to pay and can afford premium rental rates.

Infill Redevelopment
In response to limited inventory and land scarcity, infill redevelopment has emerged as a potential solution in the industrial real estate market. This is especially exaggerated in developed markets, like the large cities, where new land does not exist, but a dense population of users does.

The concept of repurposing and renovating existing industrial structures or underutilized properties has gained traction. By breathing new life into older properties, developers can meet the demand for industrial spaces while minimizing the environmental impact of new construction. Infill redevelopment not only revitalizes underutilized areas but also offers an effective solution for businesses looking to establish a presence in prime locations.

This trend showcases the industry's commitment to sustainable growth and adaptability in the face of evolving market dynamics.

Location Considerations
As the industrial real estate market evolves, the importance of location becomes even more pronounced.

Proximity to major transportation hubs, distribution networks, and population centers remains a key consideration for businesses. Access to highways, rail systems, and airports can significantly impact the logistical efficiency and operational effectiveness of industrial tenants.

And, as aforementioned, proximity to high bandwidth communication and inexpensive green power infrastructure will be key considerations for more and more tenants as technology trends such as data processing, data storage and artificial intelligence (AI) become ever more prevalent in the marketplace.

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In conclusion, the 2023 industrial real estate market presents a challenging, yet dynamic landscape. Limited inventory, expensive financing, and scarce vacant land have reshaped the market dynamics, favoring landlords and posing obstacles for businesses seeking turn-key properties.

However, developments with a forward-looking approach, focusing on proximity to or retrofitting high bandwidth communication infrastructure and on-site power production capability, hold the potential for commanding the highest rental rates.

Moreover, the industry's response to these challenges through infill redevelopment demonstrates its resilience and commitment to sustainable growth.

As the industrial real estate market continues to evolve, strategic location choices and tech infrastructure investments will be crucial for businesses to thrive. By navigating these factors and seizing the opportunities presented, stakeholders can position themselves for success in the dynamic and ever-changing landscape of industrial real estate.