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January 8, 2024 Deal Watch

Industrial real estate availability to remain tight in 2024

Contributed Art Ross, executive managing director of commercial real estate company Newmark.
By Michael Puffer

Industrial real estate experts predict financing challenges for new development and strong demand for warehouse space will continue into 2024.

With low vacancy rates, this dynamic is expected to sustain high property values and rents for industrial space over the next 12 months.

“The feeling is the Connecticut market has room to realize gains in value, and will likely experience more growth compared to other (states) in the Northeast,” said Art Ross, executive managing director of commercial real estate company Newmark.

Connecticut’s largest aerospace and defense companies — Pratt & Whitney, Collins Aerospace, Sikorsky and Electric Boat — remain busy with significant multiyear federal contracts, Ross said. This has led to increased space requirements from supply chain companies and has brought new players into the market.

Connecticut’s central location in the Northeast means the Greater Hartford area will continue to draw interest from big-box retailers as well as e-commerce and logistics companies, Ross said.

The Greater Hartford industrial market cooled somewhat in 2023, due to continued economic uncertainty, with the vacancy rate experiencing a slight uptick in the third quarter, according to a market analysis by CBRE.

However, there remains little available space in the market.

Only 3.5% of Greater Hartford’s 73.2 million square feet of industrial space was vacant at the end of the third quarter of 2023, according to CBRE.

And, of the 2.7 million square feet of industrial space under construction during the third quarter, 94% was pre-leased, CBRE said.

Tough to find good assets

Tom Hill

Waterbury-based commercial broker Tom Hill III said available industrial space is limited, and many properties that are on the market are antiquated and lack the tall ceilings sought by modern businesses.

The market has also seen pressure from “numerous types” of semi-commercial users and contractors, who have occupied much of the available “flex” space, Hill said.

Connecticut’s lingering Transfer Act is another big challenge, Hill said, tying up otherwise usable properties in a costly and expensive review process.

Under the law, any property that stored or produced more than 220 pounds of hazardous waste in a given month must undertake an extensive review process, including studies to prove the property is not a pollution hazard.

A board led by state environmental staff is working on regulations to replace this system with one that simply requires cleanup as spills occur.

Opportunities amid challenges

Meantime, some municipalities that once welcomed the jobs and taxes that came with logistics development have begun adopting more stringent land-use reviews, making it “extremely difficult” to meet demands, Ross said.

Windsor adopted a special permit review process for new warehouse and distribution proposals in 2022. Other towns have followed suit.

“The resulting lack of available industrial land for new development will likely push some companies seeking a location in the market to consider sites in neighboring regions, such as central Massachusetts or Hudson Valley, New York,” Ross said.

Adam Winstanley

Veteran warehouse developer Adam Winstanley, principal of Massachusetts-based Winstanley Enterprises, cited the roll call of familiar headwinds: high interest rates, lack of borrowing opportunities, and ongoing land-use challenges and availability.

But there are also positive factors, including a desire by companies to add logistics space to create a more resilient supply chain that can weather pandemics, natural disasters, labor strikes, port disruptions and other unforeseen events, Winstanley said.

Demand remains strong from the e-commerce sector, he noted.

Winstanley’s company continued to make a string of big-ticket industrial space investments during the second half of 2023, paying $122.3 million for a 1-million-square-foot Windsor warehouse occupied by Amazon, and another $4.6 million for a 133.6-acre Enfield site approved for warehouse development.

At a different Enfield property, Winstanley is preparing to break ground in early 2024 on a $135 million, 819,000-square-foot warehouse project, in partnership with Kansas City-based NorthPoint Development.

With demand for quicker online-order turnarounds, companies will need to add more buildings in the 40,000- to 150,000-square-foot range, Winstanley said.

Winstanley said he also predicts growing demand for “sustainable” buildings that incorporate renewable energy, natural lighting and electric vehicle chargers.

Automation will also be a driver, with some companies needing very specific dimensions, including higher ceiling heights, to make their equipment lines function.

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