Industrial vacancy has risen for six straight quarters to reach 6.1% in June and more space is soon to be delivered. But developers need not panic as the tide is about to turn, according to Marcus & Millichap’s midyear 2024 industrial report.
In those six quarters, the company noted, nearly 629 million SF of industrial space was delivered nationwide, increasing inventory by 3.5%. In 2Q 2024, the average asking rent fell for the first time since 2011, after spiking 44% over the preceding five years.
However, the report pointed out, that 27% of current vacancies occurred in just five metros: Atlanta, Dallas-Fort Worth, Houston, Riverside-San Bernardino, and Phoenix. Even though these are metros with high demand, vacancy is expected to rise as they are flooded with 108 million SF of new industrial space collectively in 2024, compared with 129 million SF to be spread among the remaining 31 metros studied.
With much new construction expected to be delivered before the end of the year, “completions may fall short of long-term demand in most markets, as tenants frequently favor newer and higher-tech facilities,” the report commented. That trend is spurred by automation and robotics, which encourage a search for newer facilities that offer these amenities. “New move-ins have generally entailed tenants vacating older, more rudimentary facilities,” it noted.
Demand for industrial space is also driven by the growth of e-commerce. “These factors will amplify omnichannel retailers’ and logistics providers’ long-term space demand, with leasing activity showing strength in the first half of 2024,” the report stated, citing the examples of Amazon, Walmart, Home Depot and Burlington.
In the first six months of the year, some companies opted to acquire their own facilities. They included Microsoft, NVIDIA, Nestlé and Fortinet.
The additional space required to accommodate increased automation is also driving industrial demand. Over 35% of the construction pipeline consists of facilities of one million or more SF and this was the only size category to improve net absorption in the year ended June 24. Rents in this category also improved 4.6% year-over-year for new supply.
At the same time, the report predicted demand for smaller to mid-sized facilities would rise over time, encouraged by new federal programs like the CHIPS Act and the Inflation Reduction Act as well as the shift to reshoring and nearshoring that encourage domestic manufacturing. Indeed, by segment, manufacturing had the lowest vacancy rate (4.5%) but also the lowest rent growth (3.2%). As of June, roughly 92 percent of the manufacturing space under construction already had a tenant in place.
“These dynamics position most metros to observe upticks in manufacturing demand for older, sub-250,000 square foot properties, influencing some owners to upgrade existing facilities to attract prospective tenants,” the report said.
Even the smallest facilities – which represented only 2.7% of active construction — are expected to benefit. “Ranking as the least-vacant size tranche as of mid-year 2024, assets between 10,000 and 50,000 square feet captured at least a 10-year-high share of trades in the first six months,” it noted.
The report also cited an active industrial lending environment that Fed rate cuts would boost. It noted that insurance companies accounted for 25% of all industrial financing in 2023 – the highest level in eight years – “mostly in the form of portfolios priced at $25 million and above.” Regional and local banks remained the primary lenders for loans of $10 million or less, representing 33% of all loans. Manufacturing and R&D sites are favored.
“Moving forward, the industrial sector’s long-term leases, limited move-out risk relative to other property types, and high availability of federal grants and tax breaks will continue to lead lenders to view these assets positively,” the report stated.
