At this article, we will take a deep dive into the current condition of the United States industrial market. The industrial real estate sector, a backbone of the U.S. economy, has undergone significant changes in recent years, influenced by a variety of macroeconomic factors such as fluctuating demand, rising interest rates, supply chain disruptions, and the aftermath of the COVID-19 pandemic. In this analysis, we will explore key market indicators, including leasing trends, rent growth, vacancy rates, and construction activity, to provide an insightful view of the U.S. industrial market as it stands in 2024. By examining the data, we will also highlight the trends and challenges facing property owners, investors, and tenants alike, and discuss the market outlook for the near future.
Vacancy Rates: A Shift Toward a Tenant-Favored Market
The U.S. industrial real estate market is in the midst of a transformation, marked by rising vacancy rates. For the past eight consecutive quarters, vacancy rates have been steadily climbing, signaling a power shift in favor of tenants. Currently, the vacancy rate stands at 6.6%, up from recent years when rates were notably tighter. Market analysts predict that vacancy rates could continue to rise, peaking at around 7% by mid-2025, which is closer to the long-term 20-year historical average.
This increase in vacancy rates is due, in part, to a significant influx of new supply entering the market, combined with a deceleration in tenant demand. However, despite these rising vacancies, the industrial market is far from being in a downturn. In fact, while the pace of new lease signings has slowed compared to the boom period of 2021-2022, certain sectors—particularly logistics and e-commerce—are beginning to show signs of stabilization and even growth.
Leasing Trends: Recovery in Sight?
Leasing activity, while weak by historical standards, has shown its first signs of improvement in over five quarters. Net absorption of industrial space, which had been at its lowest levels since 2012, is beginning to recover. This is a positive indicator that tenant demand is gradually picking up.
E-commerce, in particular, is playing a pivotal role in driving this recovery. Amazon, the largest U.S. industrial tenant, has resumed expanding its distribution network after a period of contraction. The company's rebound in profits has allowed it to sign new leases across key markets such as the Inland Empire, Phoenix, and Stockton, California. In 2024 alone, Amazon has already signed more leases than it did throughout 2023.
However, the industrial market's recovery remains fragile, with some risks that demand may not rise consistently in the coming quarters. Much of the recent uptick in goods imports and leasing activity may be attributed to retailers pulling orders ahead of potential tariff increases after the November election. As such, while the leasing market is stabilizing, external economic factors may continue to influence its trajectory.
Rent Growth Slows, But Not Across the Board
After years of rapid increases in industrial rents, the market is now experiencing a slowdown in rent growth. Year-over-year rent growth has decelerated to just 3.0%, down significantly from the double-digit growth rates seen during the pandemic boom. This is the slowest pace of rent growth since 2012, and it reflects the impact of rising vacancy rates and a more cautious tenant base.
Interestingly, not all segments of the industrial market are seeing the same trend. Smaller industrial spaces, particularly those between 10,000 and 50,000 square feet, have shown resilience, with asking rents for these properties rising by 5.0% compared to the first half of 2023. This contrasts sharply with larger logistics spaces, where asking rents have actually declined by 3% over the same period. The rent performance in the smaller space sector can be attributed to their tighter availability rates and limited new supply, which has allowed landlords to maintain pricing power.
Construction and Supply: A Decline in New Projects
The U.S. industrial market is nearing the end of a record-breaking construction boom. In 2023, construction activity reached all-time highs, with over 437 million square feet of new industrial space delivered. However, as we head into late 2024, the pace of new deliveries is beginning to slow. Higher interest rates have had a chilling effect on new construction starts, which have plummeted to 10-year lows.
Although the volume of projects completing construction will remain elevated through early 2025, the market is on track for a sharp decline in supply additions by the end of the year. As speculative development slows, particularly in high-supply markets such as Austin, Phoenix, and Indianapolis, the industrial market may see tighter availability and reduced vacancy pressures in the coming years. Markets that have been flooded with new large-scale logistics projects are likely to experience the longest absorption periods.
Investment Market: Private Capital Drives Industrial Sales
Despite the cooling market, industrial real estate remains a highly sought-after asset class. In the first half of 2024, industrial sales volume reached $26.5 billion, an increase of 6% over the 2015-2019 average. Private capital continues to dominate the market, with institutional investors and REITs also playing an active role. However, while deal flow has remained relatively steady, the number of properties changing hands is significantly below pre-pandemic levels, reflecting the more selective approach that investors are taking in the current environment.
With rent growth slowing and vacancy rates rising, investors are becoming more cautious about underwriting new deals. Properties with near-term lease expirations or those requiring significant rent increases to meet market rates are viewed as higher risk. Nonetheless, stabilized industrial assets with longer lease terms and moderate rent escalation clauses continue to attract strong demand, with cap rates for multi-tenant industrial properties stabilizing in the mid-5% range.
Economic Drivers: A Path to Recovery
While the industrial real estate market faces short-term challenges, the outlook for the mid- to long-term remains positive. Key economic drivers, including consumer spending, e-commerce growth, and the ongoing expansion of the electric vehicle (EV) and semiconductor industries, are expected to fuel demand for industrial space in the coming years.
CoStar is tracking over 20 large-scale EV, battery, and semiconductor plants scheduled to open across the U.S. between 2024 and 2026. These facilities will likely generate millions of square feet of industrial space absorption as suppliers and logistics networks expand to meet demand. Additionally, as inflation subsides and interest rates potentially decline, the industrial market may see a resurgence in tenant demand, particularly in the logistics and warehousing sectors.
The Road Ahead
As we look to the future, it’s clear that the U.S. industrial real estate market is in a period of adjustment. Vacancy rates are rising, rent growth is slowing, and new construction is tapering off. However, the underlying fundamentals of the market remain strong, and the sector is well-positioned to capitalize on the next wave of demand driven by new technologies and economic recovery.
For property owners, investors, and developers, understanding the current trends and preparing for future shifts in the market is essential. Industrial real estate will continue to play a vital role in the U.S. economy, and those who adapt to the changing landscape will be best positioned for success.
At MMCG, we specialize in providing comprehensive feasibility studies for industrial projects. Our expertise in market analysis, site selection, and financial modeling allows our clients to make informed decisions and achieve their investment goals. Contact us today to learn more about how we can help you navigate the evolving industrial real estate market.
October 1, 2024, by Michal Mohelský, J.D., Principal of MMCG Invest, LLC
Sources: Bloomberg, Statista, IBISWorld, Loopnet, MMCG Database
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