As we step into 2024, the industrial real estate sector in the U.S. finds itself at a pivotal juncture, shaped by the dynamics of construction and leasing activities. The narrative of 2023 was one of resilience for established industrial properties, which largely maintained strong leasing momentum. Even those facing lease renewals often successfully renegotiated terms, securing rent hikes often surpassing 40% compared to half a decade ago.
However, the same period posed significant challenges for newly constructed, large-scale distribution centers still seeking their inaugural tenants. The interplay of elevated interest rates and a cooling economy saw demand for additional industrial spaces taper off. This decline in demand coincided with an influx of industrial construction, particularly impacting the 350 million square feet of completed projects still seeking occupancy.
Amidst these developments, the U.S. industrial vacancy rate has been on an upward trajectory for over a year. Although still at a relatively low 5.6%, this rate has risen from historic lows experienced during the pandemic, indicating a shift in the market.
The industrial real estate landscape in 2024 is poised to be shaped by two pivotal questions: the anticipated peak of vacant space and the extent of further vacancy increases. With a substantial volume of speculative industrial projects still underway, early 2024 is expected to see a continued accumulation of unleased space.
Currently, there's a staggering 416 million square feet of unleased industrial space under construction nationwide, representing about 1.3% of the existing industrial property stock. If this development pipeline materializes without pre-signed leases, and assuming a static tenant base, the vacancy rate could escalate to 6.9%, a figure last seen in 2014 and markedly higher than the pre-pandemic five-year average of 5.3%.
However, late 2024 could mark a turning point with a potential decline in new development completions, possibly stabilizing the vacancy rate. The majority of the unleased space under construction commenced before August 2023, when the Secured Overnight Financing Rate (SOFR) peaked, influencing a significant downturn in new industrial project initiations. As a result, most ongoing projects are likely to be completed in the first half of 2024, with few expected to finish in the latter part of the year.
This expected reduction in new industrial supply additions suggests that even a slight uptick in tenant demand by year-end could stabilize or tighten vacancy rates again. However, a potential economic recession could delay any decrease in vacancies.
Early indicators, such as the recent lean retail inventories and a stabilization in import decline, hint that tenants might soon be looking to replenish stock levels and expand their distribution networks. The year ahead in the industrial real estate sector thus stands at a crossroads, with its direction hinging significantly on the interplay of construction paces and evolving tenant demands.
Source: CoStar, MMCG
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