Industrial Real Estate Deals Drop Sharply As Market Cools

Introduction: End of the Boom? Market Logic Behind the Sharp Decline in Million-Square-Foot Leases

In 2021 and 2022, while the global economy struggled to recover from pandemic shocks, the industrial real estate leasing market experienced unprecedented growth. Massive order inflows, supply chain restructuring, and e-commerce expansion collectively drove explosive demand for industrial spaces. However, questions about the sustainability of this rapid growth and potential market inflection points have persisted among industry professionals.

Recent market data now provides preliminary answers. CBRE's latest research reveals a significant decline in industrial leasing activity exceeding one million square feet during the first half of 2023, raising widespread industry concerns about future directions. Is this downturn a temporary adjustment or the beginning of a long-term trend? Does it represent market normalization or the end of prosperity? This article examines CBRE's core findings, analyzes macroeconomic conditions and industry developments, and explores challenges and opportunities facing the US industrial real estate leasing market.

Part One: Data Analysis - Declining Leasing Volume and Transaction Size, Rising Renewal Rates

CBRE's report focuses on the 100 largest industrial real estate lease transactions in the US during the first half of 2023, providing clear insights into current market conditions.

1. Million-Square-Foot Leases Plunge: Demand Cooling or Return to Normalcy?

The most striking finding shows a 36% year-over-year decline in leases exceeding one million square feet, contributing to an 18% overall reduction in industrial leasing volume (373 million square feet total). Specifically, million-square-foot transactions dropped from 36 in H1 2022 to 23 in H1 2023, indicating weakening demand for massive industrial spaces among large corporations.

Key contributing factors include:

• Economic uncertainty: Global challenges like high inflation, rising interest rates, and geopolitical risks have made companies more cautious about expansion plans.
• Inventory normalization: Post-pandemic supply chain recovery has reduced the urgency for extra warehouse space that companies previously leased to address stock shortages.
• E-commerce slowdown: As pandemic restrictions eased and in-person shopping rebounded, e-commerce growth moderated, decreasing demand for industrial spaces.

2. Smaller Average Deal Size: More Conservative Corporate Expansion?

The average transaction size shrank by nearly 15%, from 926,683 square feet in H1 2022 to 789,471 square feet in H1 2023. This suggests even large corporations are adopting more measured approaches to space acquisition, preferring smaller leases that meet immediate needs rather than aggressive expansion.

Potential drivers include:

• Increased adoption of lean operations principles
• Growing implementation of warehouse automation technologies
• Continued remote work arrangements reducing office space needs

3. Rising Renewal Rates: Shift Toward Conservative Strategies?

Renewals among the top 100 transactions surged from 15 in H1 2022 to 36 in H1 2023, suggesting companies increasingly prefer staying in existing locations amid economic uncertainty rather than relocating or expanding.

This trend reflects:

• Efforts to minimize relocation costs
• Strategies to retain existing workforces in tight labor markets
• Risk aversion regarding new lease commitments

Part Two: Tenant Analysis - Retailers and 3PLs Lead While E-Commerce Cools

Examining tenant categories provides deeper understanding of shifting demand patterns.

1. Retailers/Wholesalers: Sustained Strong Demand

General retailers/wholesalers dominated with 34 of the top 100 transactions, reflecting ongoing industrial space needs driven by:

• Rebounding consumer demand
• Omnichannel retail development
• Post-pandemic supply chain resilience efforts

2. Third-Party Logistics (3PL): Continued Growth Momentum

3PL providers followed closely with 33 transactions, benefiting from:

• E-commerce companies outsourcing logistics operations
• Increasing supply chain complexity requiring specialized management
• Technology-driven service improvements

3. E-Commerce: Clear Cooling Trend

E-commerce tenant transactions halved from 14 to 7 year-over-year, indicating reduced demand due to:

• Slower online sales growth
• Optimized warehouse networks
• Large players developing in-house logistics capabilities

4. Other Major Tenants

Additional significant lessees included food/beverage (6 transactions), construction materials (6), manufacturing (3), and healthcare (2). Automotive sectors accounted for 9 transactions, benefiting from electric vehicle industry growth.

Part Three: Expert Perspective - Market Normalization and 3PL Growth Outlook

CBRE's James Breeze, Vice President and Global Head of Industrial & Logistics Research, provides professional insights.

1. Demand Normalization: Moving Beyond Pandemic Excess

Breeze explains the market is undergoing normalization after unsustainable 2021-2022 activity levels driven by post-pandemic inventory rebuilding. While demand has moderated, it remains above pre-pandemic levels, indicating healthy fundamentals.

2. Smaller Average Deals: Fewer Mega-Transactions

The drop in average transaction size primarily reflects reduced million-square-foot deals as 2022's record activity normalizes.

3. 3PL Sector: Future Growth Engine

Breeze anticipates 3PLs will become increasingly active tenants as companies favor outsourced distribution amid economic and supply chain uncertainties.

4. Renewal Trends: Conservative Posture Through 2024

He expects renewal preferences to continue through 2024 as companies prioritize workforce retention and avoid relocation risks in tight labor markets.

Part Four: Market Challenges - Multiple Pressure Factors

Beyond CBRE's analysis, additional market pressures include:

• Rising interest rates increasing borrowing costs
• High inflation elevating operational expenses
• Ongoing (though improving) supply chain disruptions
• Geopolitical tensions creating economic uncertainty

Part Five: Industry Impacts and Strategic Responses

The market cooldown affects various stakeholders differently:

1. Property Owners

Facing potential vacancy increases and slowing rent growth, owners must enhance property attractiveness through facility upgrades and flexible lease terms.

2. Developers

Requiring more cautious project evaluations, focusing on locations with long-term potential and tenant-specific solutions.

3. Tenants

Gaining stronger negotiation leverage to secure favorable lease terms while optimizing space utilization.

Part Six: Future Outlook - Normalization or Inflection Point?

CBRE's findings reveal significant market transformation as million-square-foot transactions decline and overall leasing volume contracts, signaling post-pandemic normalization.

1. Market Adjustment

Despite economic pressures, industrial real estate fundamentals remain sound as companies adapt to new conditions.

2. Growth Drivers

3PL sector expansion may offset e-commerce cooling, while renewal preferences reflect strategic responses to complex economic conditions.

3. Industry Evolution

The market slowdown may indicate transition toward more mature, rational development where operational efficiency, customized services, and market responsiveness become competitive differentiators.

Conclusion: Adapting to Transformation

The US industrial real estate leasing market is undergoing profound changes. Market participants must embrace transformation by:

• Monitoring macroeconomic and industry trends
• Improving operational efficiency through process optimization and technology adoption
• Strengthening tenant relationships with enhanced services
• Exploring innovative models like shared warehousing and smart logistics

The market's future presents both challenges and opportunities for adaptable players.

Appendix: Key Data Comparison