Predictions for Industrial Real Estate in 2024

Plus: NYC’s office market has seen higher, top-dollar demand for new constructions, renovated assets.

Predictions for Industrial Real Estate in 2024

Plus: NYC’s office market has seen higher, top-dollar demand for new constructions, renovated assets.

Together with

Good morning. Today, U.S. Treasury yields dipped, with investors pondering future inflation impacts on interest rates and the economy. The U.S. industrial real estate sector is set for growth, albeit slower, facing hurdles like community pushback, steep construction costs, and power constraints. On the flip side, Manhattan's office market is bustling with increased leasing of premium spaces.

Today’s issue is brought to you by Pace Loan Group—a national lender offering CRE owners non-recourse, long-term, fixed-rate C-PACE financing.

📊 John Burns Research and CRE Daily have teamed up for the second edition of the CRE Fear and Greed Sentiment Survey. Share your insights to help us gauge investor sentiment.

Market Snapshot

S&P 500
GSPC
4,756.50
Pct Chg:
-0.15%
FTSE NAREIT
FNER
752.06
Pct Chg:
-0.73%
10Y Treasury
TNX
3.989%
Pct Chg:
-0.028
SOFR
1-month
5.34%
Pct Chg:
0.0%

*Data as of 1/9/2024 market close.

SECTOR OUTLOOK

Trends and Predictions for Industrial Real Estate in 2024

2024 is shaping up to be a pivotal year for industrial real estate, marked by continued demand but moderated growth.

Sustainable growth trajectory: After two years of unprecedented growth, the industrial sector has reached a more sustainable trajectory. As of November, there were 505 MSF of industrial space under construction, accounting for 2.7% of existing inventory. However, capital becoming more expensive has led to a slowdown in new construction activity and buyer and seller activity tempering. Construction starts have decreased by 64% since 2022 due to high capital costs.

Supply-driven mini-cycle: Industrial completions hit historic highs in 2023, rising 33% YoY by Q3, fueled by pre-rate hike construction starts and capital market cooling. Prologis' Head of Global Research, Melinda McLaughlin, observed a supply-driven "mini-cycle" in the logistics market, with a temporary surge in new supply, followed by fewer deliveries in 2H24. Vacancy should hit historically low levels in mid-2024 before dropping more with lower supply and higher demand.

Remaining challenges: Capital availability for new industrial projects is a major challenge for developers and operators. Conservative underwriting lowers bids and fosters build-to-suit projects. But regional markets differ. SoCal and NJ's entitlement processes limit service, while Southeast markets enjoy development growth due to high population. Retailers regionalize operations for faster delivery and lower expenses.

➥ THE TAKEAWAY

Zoom out: 2024 will see a surge in U.S. manufacturing investments driven by reshoring and nearshoring, coupled with a strong emphasis on sustainability. While tackling skilled labor and energy challenges, markets that offer incentives and collaboration stand to gain. Concurrently, a growing commitment to sustainability is evidenced by efforts to reduce carbon footprints through innovative, eco-friendly practices and materials.

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LEASING SURGE

Record Number of Office Tenants Sign $100+ PSF Leases in Manhattan

Manhattan Signs Record Number of $100-Plus Office Leases, JLL Says

Financial Services Tenants Make Up 80% of All Top-Dollar Deals (Costar)

Manhattan's office market is experiencing a surge in high-end leasing activity, with a record number of office tenants signing leases with starting rents of $100 PSF or more in 2023, according to brokerage firm JLL. 

Top-dollar leasing: Last year, Manhattan saw a record number of deals with starting rents of $100 PSF or more, totaling 192 leases and 5.6MSF of space. This accounted for 26% of the total leasing activity in Manhattan last year. Financial services firms, such as private equity and hedge funds, dominated this leasing activity with an 80% share, followed by legal services with an 8% share.

Flight to quality: Despite a lackluster return-to-office rate and economic uncertainty, there is a growing demand for high-quality office spaces. Tenants are gravitating to new construction and heavily renovated assets, seeking desirable space even in the face of challenging conditions. The surge in top-tier leasing activity highlights the preference for higher-quality products despite remote/hybrid work.

Tech sector retreat: While financial services continue to dominate top-dollar leasing activity, the tech sector has seen a decline in its share of high-end office deals. In 2023, tech accounted for only 5% of the top-dollar leasing deal count and 6% of square footage, down from its peak in 2019 when it accounted for 50% of square footage and 13% of deals.

➥ THE TAKEAWAY

Bouncing back: Despite fragility in the market, Manhattan's high-end office market remains strong. Top-dollar leasing activity signals demand for quality office spaces, especially in new construction and renovated assets. The high end of the market has rebounded, with starting rents up 6% and availability rates decreasing.

✍️ Editor’s Picks

  • A fresh approach: In her State of the State speech, Governor Kathy Hochul proposed a new replacement for the 421a property tax break and an extension for its completion deadline.

  • Declines dominate: Investment sales declined in November, with retail performing the best with just a 10% MoM decline.

  • Waves of distress: Harbor Group International (HGI) predicts a "tsunami of distress" for CRE in 2024 but remains confident in the success of its NYC Black Rock office building in NYC, which has seen occupancy over 90% and rents starting at $90 PSF.

  • Damn delinquents: CMBS delinquencies are expected to reach 4.5% in 2024 and 4.9% in 2025, up from 2.25% in November 2023.

  • The talent tightrope: CRE firms anticipate a challenging 2024 for employers and employees, with high demand for property managers and more pressure on firms to offer higher pay.

🏘️ MULTIFAMILY

  • Multifamily moves: Conserve Holdings ended 2023 with a bang, expanding its portfolio with two prominent acquisitions all within a month: the 183-unit Cottage Trails Apartments in Chesapeake, VA, and the 288-unit Northcliffe Forest Apartments in Winston-Salem, NC. Both deals were funded with internal capital.

  • Hotspot: San Francisco investors purchase a River West apartment building near Fulton Market for $17.5M.

  • Bond refi: Lightstone secures $165.6M agency-backed debt from Freddie Mac (FMCC) to refinance a Brooklyn multifamily property.

🏪 RETAIL

  • If you build it: WestWood Investments Cos. secures a $54M construction loan for The Ranch at Model Colony retail project in Ontario, CA, with over 90% preleased.

  • Saying goodbye: Nike (NKE) and Tiger Woods end their iconic partnership after nearly 30 years, with Woods likely earning $500M through the deal.

🏢 OFFICE

  • Flipping fortunes: San Bernardino County purchases a 115.5 KSF office building for $26.8M, part of a five-building portfolio sold for $69.9M.

  • Austin ascends: Austin's office development is seeing significant growth, with 5.7MSF of office space across 36 properties in the pipeline as of November 2023.

CHART OF THE DAY

The Federal Reserve’s fight to rein in inflation is squeezing the ability of real estate investors to make money.

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