South Florida’s industrial leasing market posted another seven-figure performance in the third quarter of 2022, with approximately 1.4 million square feet (msf) of positive net absorption at the close, keeping the region on track for another dynamic annual performance.
Year-on-year, more than 6 msf of industrial space was absorbed throughout the region. New leasing activity for the third quarter totaled 3.8 msf, which represents more than 12.9 msf of leasing deals for the region so far this year.
In response to continued demand, more than 5.1 msf of new inventory has been added so far in 2022, with more than 10 msf of industrial space still under construction. Asking rents also continued their upward trajectory, breaking records. The only caveat is that asking rents for the new development are reported to be negotiable with deals being negotiated between $12 and $15 per square foot of triple net. However, most of the asking rents impacting South Florida’s overall averages come from already built secondary or lower industrial space. Price pressure is so high that in 2022, rent demand for new space from landlords saw monthly versus quarterly increases, a trend never seen before.
When breaking down the South Florida region by its major markets, Miami-Dade County continued to lead the price for industrial space, followed by Broward County, while Palm Beach remains a smaller market compared to its southern neighbors and has seen an uptick in recent development. .
Miami’s industrial vacancy rate remained virtually unchanged over the past three quarters at around 1.9 percent at the end of the third quarter. This was a decrease of 90 basis points from the previous year. The county held the lead in demand with more than 660,000 square feet of net absorption, representing 4.6 msf of space absorbed so far through 2022. Third quarter leasing activity reached 2.5 msf during the quarter, bringing new business activity year-to-date increased to 8 msf as of today compared to 8.8 msf leased at the same time in 2021.
Absorption was flat compared to the previous year, while leasing activity fell slightly. The data is more representative of limited blocks of space in existing secondary buildings rather than falling demand. In fact, about 30 percent of the 7.9 msf of new industrial inventory under construction in the third quarter was already pre-leased. A handful of proposed projects were fully leased but did not break ground at the end of the quarter, including Beacon Logistics Park D, a 226,700-square-foot distribution building leased to All Florida Paper.
Limited space options drove the overall average rent up 31.8 percent year-over-year, breaking double digits in early 2021 and rising to $11.79 per square foot at the end of the quarter. For areas with new development in key submarkets, asking rents are between $13 and $16 per square foot triple net. The biggest water mark was the Miami Airport West submarket with rents approaching $19 per square food triple clean.
Broward County posted its strongest performance in demand growth during the third quarter, with 456,000 square feet of space absorbed, generating 789,000 square feet of positive net absorption in 2022. This caused the overall vacancy rate to drop slightly from the previous quarter to 3.5. percent, down 150 basis points from the third quarter of 2021 and the largest year-over-year vacancy decline in the region.
In a similar trend to Miami-Dade, Broward saw a slowdown in leasing activity compared to 2021. 1.1 msf of new deals were signed in the third quarter, representing more than 3.7 msf of transactions year-over-year, which is significantly lower than the 5.2 msf signed in the same period a year ago. Additionally, 88 percent of the 1.8 msf of industrial product under construction remained available for lease. Notably, approximately 650,000 square feet of vacant sublease space was in the process of being returned by a subtenant in the e-commerce sector at the time the quarter ended, so space will be added during the fourth quarter.
Nonetheless, Broward County is well-positioned to address these recent developments as demand remains strong and some commercial real estate professionals see additional space as a much-needed option from limited space availability impacting average rents. The overall average rent jumped more than $3 per square foot from this time last year, closing the third quarter at $13.72 per square foot triple net, surpassing the Palm Beach market, which previously held the highest overall average in Florida. Land constraints for industrial development are likely to continue to push asking rents up through next year and into 2024.
Palm Beach saw an improvement over the previous quarter, with industrial demand coming in at 257,000 square feet of net absorption. That brought year-to-date totals to 631,000 sq ft – less than half of the 1.4 msf seen at this time last year. However, considering last year’s outlier, a 1 msf mega-distribution facility occupied by an e-commerce company, the industrial segment will have another solid performance. Leasing activity was down slightly from the previous two quarters, coming in at 235,000 square feet in the third quarter and accumulating more than 1.2 msf year-to-date. That was on par with 1.3 msf at the same time a year ago.
Total vacancy increased 10 basis points to 3 percent due to the completion of 321,000 square feet of available space at Airport Logistics Park. Still, overall vacancy fell 20 basis points compared to the same period last year. Contributing to these data points were more than 800,000 square feet of speculative space under construction during the quarter, the most since the beginning of the industrial boom. Approximately 35 percent of these spaces are already leased. The overall average rent rate in Palm Beach County rose 14.3 percent year-over-year to $13.65 per square foot, a significant difference between Miami-Dade and Broward counties.
What will be next?
South Florida’s third-quarter results are in line with trends over the past two years, where the industrial segment has become the “golden child” of commercial real estate — both nationally and regionally. The industry, once considered the “family villain” of various property types among various commercial segments, has risen to the fore, eclipsing the office and retail sectors as safer investments.
The boom in South Florida’s industrial real estate sector began a little earlier — around 2016, when infrastructure improvement projects at the Port of Miami were ending around the same time the Panama Canal expansion was completed. Logistics and distribution companies, along with retailers, wholesalers and e-commerce giants, have begun to see opportunity in the region, which serves as a gateway to Latin America and the Caribbean islands. Over the following years, South Florida became a global player in the supply chain industry.
The global COVID-19 pandemic has only accelerated the rise of the industrial sector to the top in South Florida. The region has seen record demand growth since 2020, with around 17.2 msf absorbed in 2021 and 2022. This spurred robust construction of new industrial development throughout South Florida totaling over 24.5 msf during the same time period. Despite intense construction activity, the overall vacancy rate remains consistently well below 5 percent in all three districts, indicating tight market conditions. Landlords have also continued to take advantage of these record-breaking market fundamentals, which have translated into skyrocketing rental rates that were previously thought to be unimaginable, now a reality for industrial space. The overall industrial market in South Florida remains strong and robust, a trend that is likely to continue through the end of the year despite growing economic headwinds.
Eric Messer is a senior research manager at Cushman & Wakefield.