The industrial vacancy rate topped 5% in the fourth quarter for the first time in three years and that trend is expected to continue through 2024 as new supply outstrips demand, according to Colliers’ Craig Hurvitz in a new report.
He said the vacancy rate is forecast to stabilize at around 6.5% during the second half of 2024, while markets with a significant amount of new product relative to the overall industrial inventory may see rates exceed 10%.
Big box space in particular has become increasingly difficult to fill, says Adrian Ponsen, national director of U.S. industrial analytics at CoStar Group. “Those challenges will likely persist during most of 2024,” he tells GlobeSt.com.
Meanwhile, demand for infill space remains strong, says Andrew Holmberg, Partner, Berkeley Partners. “It is taking longer to lease units across the size spectrum, but with the smaller infill units, the vacancy rates remain very low, and as a result operating fundamentals and rent growth continue to be healthy.”
There are 390 million square feet of unleased industrial space under construction across the country set to complete and drive vacancy up further, CoStar estimates.
“The bright side is that most of that space is within projects that have already been under construction for more than nine months, meaning almost all of it will complete construction by summer or fall of this year.
“After that, the number of new developments completing each quarter will sink to a very low level as an after-effect of the sharp pullback in groundbreaking on new projects that happened as 2023 progressed.
“This means there’s a good chance the US industrial vacancy rate peaks later this year, and begins to tighten again after that, particularly if mortgage rates can continue their recent declines. Lower mortgage rates would revive home sales, along with sales of warehouse space intensive goods like appliances and furniture and revive demand for space among tenants in those industries.”
Companies that choose to invest in new construction will be rewarded in 2025 and 2026, predicts Stephen Evans, Managing Director of Black Salmon. “The cost to build has increased due to financing, construction, and land costs, among other factors,” Evans said. “This, in turn, has slowed new construction starts over the past 12 months. However, demand will continue, albeit at a slow pace.”
Rising vacancies, though, won’t necessarily translate into lower rents, Colliers’ Hurvitz said, noting that more rent growth is forecast in most markets in 2024, although at a more tempered pace, closer to historical averages of between 4% and 8%,” he said.
Ponsen said that owners of industrial properties are still benefiting immensely from a rent perspective, since their in-place leases that are expiring are on average, four or five years old, and many are getting renegotiated and renewed at new rents that are more than 40% higher, as the enormous rent gains that occurred during the pandemic are factored in.
Lease expirations like those will continue to pay dividends in 2024, he said.
Source: “Industrial Vacancy Rate Expected to Peak at 6.5% in H2“
