How Is Inflation Affecting Industrial Real Estate?

​April’s CPI and PPI both rose for the second straight month. Currently, 3.5% CPI is above the fed’s target and the markets aren’t pricing in the rate cuts that were expected over the past 6 months. The ten year treasury ended 2023 below 4% and after the last CPI report, the ten year is now above 4.5%. Expect investment sales volumes to remain similar to those of 2023.

Here’s the good news, with inflation on the rise again, we can expect the Tucson industrial market to remain strong and lease rates to continue to increase. 2024 could be the year where we see more industrial buildings get demolished, than delivered. Meanwhile, demand remains strong throughout the industrial market.

The sticky part of inflation for Tucson is with construction. Many developers have put their plans to build on hold, not because of interest rates or lack of tenant demand, but mostly due to the rise in construction costs. Last month a Tucson residential subcontractor who does lots of work for the national homebuilders told me that they just had their biggest month in terms of new unit contracts, almost doubling their March 2023 volume. The subs are still busy and despite industrial construction slowing, construction costs remain elevated mostly due to the increase in residential construction and lack of skilled trades labor.

With most recent projects, I’ve seen construction costs increase for smaller warehouses (30,000 SF and below) and costs come down just a little bit with bigger bay, concrete tilt construction. While materials have come down in pricing, labor costs continue to rise. 

​Land transaction volume and prices remain strong for sub 10 acre parcels. This sub 10 acre parcel market is the strongest we’ve seen it and values are seeing around 30%+- YOY increases. Industrial land over 20 acres is slower as many developers are holding onto 20 acre + parcels and few users need 20 + acre parcels. As building values and lease rates continue to increase, we can expect demand for sub 10 acre parcels to continue because if you are in need of 10,000 SF and the cost to buy existing construction is north of $150 per square foot, why not just build exactly what you need?