🔒Industrial real estate market remains hot, but threat of slowdown looms

The industrial commercial real estate market has been hot in Connecticut for years, and 2022 was no different, but there are some signs of a slowdown.

Some e-commerce companies, like Amazon, halted certain new construction projects or major leases amid tightening demand coming out of the pandemic and other market pressures, like higher interest rates, supply chain issues, labor shortages and rising material costs.

Mark Duclos, president of Hartford-based Sentry Commercial, said Greater Hartford industrial vacancy rates remain at all-time lows. High-bay, Class-A vacancy rates in the region are below 5%, he said.

At midyear 2022, the region had an overall industrial vacancy rate of 3.7%, with companies adding 1.3 million square feet of space through the first six months of 2022, according to brokerage firm Newmark.

However, inflation has increased annual rent hikes (in the 3% to 4% range), and higher interest rates have softened the industrial investment market, Duclos said.

That has reduced the number of bids on for-sale properties and sent some sellers to the sidelines.

Even still, Art Ross, Newmark’s executive managing director, said Greater Hartford saw over 2 million square feet in new industrial construction in 2022, as well as out-of-state companies committing to the market.

For example, department store giant Target recently signed a lease to occupy a new 530,000-square-foot industrial building in Windsor at 500 Groton Road, while Columbus, Ohio-based Safelite Group, parent company of Safelite AutoGlass, has signed a long-term lease to occupy 165,625 square feet in the Baker Hollow Logistics Center, at 105 Baker Hollow Road in Windsor.

As we move into 2023, here are some industrial real estate market trends to keep an eye on.

Impact of potential recession

Duclos said he expects activity in the region’s industrial market to remain strong (as compared to historical averages) in 2023, but it will likely continue to slow.

“The question is, are we going from 120 mph to 100 mph or to 50 mph. Much of that depends on the economy and the ‘R’ word,” he said.

At the end of 2022, Ross said there were five or six users looking for 500,000 square feet to over 1 million square feet of industrial space in the southern New England market.

Countering recessionary fears, Ross said, is the state’s strong defense and commercial aerospace sector, particularly the long submarine manufacturing pipeline at Electric Boat. The Groton-anchored company has plans to hire thousands of workers as it builds a new ballistic missile submarine fleet for the U.S. Navy. That work could translate into significant space needs for Electric Boat’s local vendors and suppliers.

Meantime, Ross said developers have told him they still plan to build new warehouse facilities on spec next year, despite the threats of recession.

“It will be interesting to see how many, if any, proceed to construction prior to landing an actual tenant commitment,” Ross said.

Possible reshoring boost

Another potential boost to the industrial market is the reshoring trend being considered by some U.S. manufacturers in the wake of supply chain headaches experienced during the pandemic.

Some companies are leaving China, or at least reducing their reliance on Chinese manufacturing and looking for new markets to strengthen their supply chain, Duclos said.

“What is unknown is how many will relocate their operations to other parts of Europe or Asia and, if they reshore, how much of that will come to the U.S. or end up in Mexico and Canada,” Duclos said.

NIMBYism threat

Meantime, after years of steady growth in warehouse development without much zoning pushback, 2022 gave rise to significant NIMBYism in the industrial market.

Several Greater Hartford towns — like Windsor, South Windsor and Enfield — weighed or implemented warehouse development moratoriums or new restrictions on large-scale projects amid growing traffic and other concerns from residents.

Ross said he counted at least five big-box developments (ranging in size from 345,000 square feet to 1.5 million square feet) that were rejected in 2022 in the towns of South Windsor, Newtown, Willington, East Granby and Cromwell.

Those increasing barriers to entry for new development, in addition to a lack of large industrial-zoned sites in Connecticut, could further strain the market in 2023, and send some developers and tenants currently in the market for space to neighboring states, Ross said.

Pricing concerns

With the cost of goods, construction materials and capital continuing to rise — or at least remaining at elevated levels — it could create a drag on the industrial market.

Rising interest rates, for example, have created uncertainty in the capital markets, slowing the level of investment transactions, Ross said.

As a result, “some potential sellers have delayed placing properties on the market, with other sellers pulling fully launched sale opportunities from the market,” he added.

If that continues into 2023, it will be further signs of a slow down, Ross said.