Industrial Market Overview Report: Part Three

SKIP AHEAD TO

• Effective Rents Near or at Peak Amid Slowing Rent Growth Across 
Major Markets
• Concessions Expand and Starting Rents Moderate as Market Decelerates
• Coupled With Declining Lease Terms, Free Months Are On the Rise, Leading to Higher Free Rent Ratios for Bulk Transactions
• Average Annual Lease Escalations Persist at Elevated Levels
• Tenants Still Experiencing Significant Jumps From Current Rent at Renewal

CompStak conducted an in-depth analysis of market statistics across eight major U.S. markets, with a special emphasis on the Los Angeles-Orange County-Inland Empire region. Leveraging CompStak’s comprehensive data, we’ve identified a trend of moderation in the industrial leasing sector. Our upcoming blog series will delve into these insights, providing a detailed exploration of the industrial real estate landscape.

Interested in exploring the full report? Find it here.

Effective Rents Near or at Peak Amid Slowing Rent Growth Across 
Major Markets

Effective rent growth in the industrial sector is showing signs of peaking across five markets: Houston, Atlanta, Dallas-Fort Worth, Phoenix, and Northern–Central New Jersey. Meanwhile, the Los Angeles–Orange County–Inland Empire market is the first of the major markets to show signs of softening, with rents peaking in the first half of 2023 and now down 14.6% since then. Other markets have also exhibited effective rent declines from the peak, though to a lesser degree. These include the Chicago metro market where rents are now down 1.7% from the peak, and the Philadelphia–Central Pennsylvania market, with a 5.5% decline from their recent highest level.

While major markets are showing signs of peaking across different periods, each of these eight major markets has a year-over-year growth rate in March 2024 that is down from its peak rate reached between May 2022 (Los Angeles–Orange County–Inland Empire) and November 2023 (Chicago metro). Effective rents are plateauing or declining across these major markets because landlords are providing more concessions and charging lower starting rents than in previous periods.

Concessions Expand and Starting Rents Moderate as Market Decelerates

Notably, the softening and moderation in the industrial sector is evident in the decline or stagnation in both starting rents and effective rents. This change indicates that landlords are adjusting base starting rents and offering more concessions, like the free rent period’s share of the term. While effective rents for bulk transactions are down by a greater percentage from the peak as compared to non-bulk ones, the opposite is true for starting rents. Transactions from 10,000 square feet to 99,999 square feet are down 4.5% from the peak reached in October 2023, while they are down 2.4% from the peak reached in January 2024 for bulk transactions, across the eight-market average.

Coupled With Declining Lease Terms, Free Months Are On the Rise, Leading to Higher Free Rent Ratios for Bulk Transactions

Starting rents for bulk transactions have declined less than those under 100,000 square feet, and they have also seen the sharpest increase in free rent ratios from 2023 levels. The average free rent ratio of lease term for bulk transactions reached a low in August 2022 of 1.7% but has since increased by 180 basis points to 3.5% of lease term as of March. The same period saw non-bulk transactions increase by 70 basis points for this metric. This increase in the rent-free share of a lease term has happened because the average number of free months increased at the same time as the average number of months of lease term also declined from peak. Again, this change has been more profound for bulk transactions: In August 2022, the average lease term length was 77.2 months and the average free months was 1.4 months, but in March of this year the term length average was 2.1 months shorter, while the average free months was up by 1.2 months.

Average Annual Lease Escalations Persist at Elevated Levels

While increasing free rent periods and moderating or stagnating starting rents are emerging across major markets and yielding slightly more favorable tenant conditions, lease escalations have shown less movement, indicating that landlords are less willing to negotiate on this part of the deal. Lease escalations steadily increased from mid-2021 before peaking in June 2023 and September 2023 for non-bulk and bulk lease transactions, respectively, across the major market average. However, since those peak periods, the average annual lease escalation for non-bulk deals has declined by just .01 percentage points, and by .03 percentage points for bulk industrial deals.

Further evidence of sustained lease escalation above pre-pandemic levels emerges when examining lease terms. Escalations have trended similarly with respect to peak for lease terms both above and below 60 months for non-bulk deals and above and below 72 months for bulk ones.

Tenants Still Experiencing Significant Jumps From Current Rent at Renewal

In terms of starting rent increases at the time of renewal, tenants in the Los Angeles–Orange County–Inland Empire market are encountering some of the highest jumps across major markets. When evaluating the top ten largest renewals inked from Q2 2023 to Q1 2024 across major markets, seven took place in this market, where renewal increases ranged from 136% to 220%. Overall, most tenants that signed these largest deals in these markets were in logistics, distribution, and consumer goods. Across these top ten deals, the average weighted increase from the current rent to the renewal’s starting rent was 117.6%.

On average, the starting rent for renewals and extensions signed from Q2 2023 to Q1 2024 outpaced the average for new leases and expansions in each of the four markets featured among the top ten renewals by size. Notably, the largest gap was in Dallas–Fort Worth, where the average starting rent for renewals and extensions was 10.3% above the average for new transactions.

Want complete insights? Download the full report here.