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FED Rate Hikes: The Latest Hiccup in Warehouse Demand

Low Vacancy Rates and Rising Rents Expected in 2023 Despite Interest Rate Volatility.

In 2022 the Federal Reserve's rate hikes slammed the US logistics real estate market but did little to affect experts' expectations of robust leasing activity, low vacancy rates, and rising rents throughout 2023.

The interest rate volatility in 2022 struck fear into the hearts of investors, many of whom put the brakes on prospective deals due to a perceived lack of visibility into transaction outcomes. Even so, vacancy rates still declined throughout the year, and rent growth continued.

American commercial real estate services investment giant CBRE Group predicts that rents will rise 12% to 15% in 2023 due to strong demand and near record-low vacancy rates nationwide. As a result, 2022 was second only to 2021 in the amount of industrial property leased in North America.

During 2021 and 2022 more than 2 billion square feet of industrial real estate leased, and much of the new development completed during this period was quickly utilized due to increased inventories driven by ecommerce. CBRE's global head of industrial and logistics research, James Breeze, notes that in certain markets, such as Southern California and New Jersey, average rents are up a staggering 40% compared to last year.

Toronto-based Colliers International, a global force in professional services and investment management, reports that new investment tapered off in 2022 in response to interest rate turbulence. However, longstanding projects are now being completed, and new projects that are already funded will still result in the construction of 'spec' buildings (buildings constructed without specific tenants lined up).

Jack Rosenberg is the national director of logistics and transportation at Colliers' industrial advisory group. He notes that interest rate moves have never been a major factor in determining the pace of occupier activity and that GDP drives demand patterns to a far greater extent.

Prologis, the world's largest industrial real estate developer, predicts that development starts will decline 60% in 2023 due to the brisk increase in the cost of capital resulting from the Fed's explosive expansion of benchmark interest rates. However, the developer does anticipate another year of double-digit rent growth fueled by low vacancy rates.

At Watchpoint, we expect warehouse demand in the San Francisco Bay Area to remain similarly unaffected by rising interest rates due to continued strong demand. The Bay Area region remains a hub for innovation and technology, and our abundant major tech companies and e-commerce businesses, geographic advantages, and proximity to international shipping hubs will continue to drive demand for industrial real estate in the years to come.

While the FED rate hikes will impact the overall cost of doing business in our region, it's unlikely they will significantly affect the demand for warehousing space. And while the hike may increase average base rents, we expect demand will continue to outpace supply. The result? The trend of positive net absorption will continue and support a thriving warehousing and logistics industry.

If you are looking for new or additional resources to meet your logistics and supply chain needs, contact us at Watchpoint Logistics, Inc. and a team representative will get back to you.

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