The coming year is likely to be one of transition for the industrial sector as the pandemic-driven supply boom that reached 1.1 billion square feet fades, according to a Yardi Matrix report. Industrial space has gone from scarcely available in 2021 and 2022 to more readily available for occupiers, with the national vacancy rate standing at 8% compared with less than 4% two years ago.
About 350 million square feet of industrial space is under construction, representing 1.7% of stock. Starts were just 236 million square feet in 2024, down 35% from 2023 and more than 60% from 2022.
“The combination of slowing demand for space and higher borrowing costs for construction loans has cooled the development pipeline, and we do not anticipate any significant increases in starts this year,” said Yardi Matrix. “Though borrowing costs have come down somewhat in recent quarters, inflation remaining stubbornly above the Fed’s target rate will lead to fewer benchmark rate cuts than was previously anticipated. Beyond more expensive construction loans, the wave of new supply delivered over the past few years is still being absorbed and will temper developer enthusiasm for new projects for the time being.”
In addition to a contracting pipeline, the composition of what is being built is changing, with manufacturing and data centers making up a larger portion of construction rather than warehouse and distribution facilities. The report predicts data centers will remain in high demand as long as tech firms invest in resource-intensive artificial intelligence. Meanwhile, annualized construction spending on manufacturing facilities was $235 billion in November, a figure that has tripled since 2021, according to the Census Bureau data. Yardi Matrix said it expects this trend to continue although cuts to clean energy incentives could cause disruptions.
Fundamentals in the industrial sector remain solid but headwinds persist in the form of potential tariffs, immigration policy and local restrictions on industrial development.
National in-place rents for industrial space averaged $8.30 per square foot in December, a three-cent bump from November and a 6.6% increase over the past year. Rents grew strongly in port markets, led by New Jersey with in-place rents increasing 9.8%. Miami, the Inland Empire and Atlanta each showed strong rent growth as well, while Midwestern markets had the lowest rent growth.
The Producer Price Index, a measure of the prices producers pay for goods and services, rose sharply in December. The goods portion of the index increased 0.6% for the month and 1.8% for the year, while the services portion was flat for the month but up 4% yearly. From 2023 to 2024, the PPI averaged a yearly increase of 1.3%.
“While these are minor increases compared to the growth the index experienced in 2021 and 2022, it remains a somewhat worrisome development,” said the report. “Higher prices on the supply side of the economy can be a leading indicator of increases in the consumer index. Inflation remaining above target will lead the Fed to enact fewer rate cuts this year. In addition, higher borrowing costs will impact construction activity and transaction markets, and lead to occupiers holding back on expansions and new leases.”
Source: “Industrial Sector Faces Transition as Supply Boom Fades”
