The start of 2023 saw numerous U.S. industrial properties in a well-leased state,
maintaining this status throughout the year. Even property owners facing expiring
leases often successfully renewed them, sometimes at rents exceeding those of five
years prior by over 40%.
Challenges for Newly Built Properties
Newly built and vacant big-box distribution properties faced challenges in 2023. Higher interest rates and diminishing tenant demand created obstacles, impacting the 350 million square feet of completed industrial projects that remained unreleased.
Steady Rise in Industrial Property Vacancy
The supply of new industrial space outpaced tenant demand, leading to a steady rise in the U.S. industrial property vacancy rate. Currently standing at 5.6%, it’s higher than the pandemic-induced all-time low but still favorable for most building owners.
Outlook for 2024
As the industrial vacancy rate increases, key questions for 2024 revolve around when vacant space will peak and the extent of further vacancy. With a substantial number of speculative projects in development, the first half of the year is expected to see a continued accumulation of vacant space.
Construction Boom and Potential Impact
Currently, 416 million square feet of unleased industrial space is under construction, constituting about 1.3% of the existing nationwide property stock. Under the assumption of a constant tenant base and no signed leases, the U.S. industrial vacancy rate could rise to 6.9%.
Signals of Supply Pressure Reduction
While the probability of a significant increase in the U.S. industrial vacancy rate is high in the first half of 2024, signals indicate that supply pressure from new developments will decrease considerably in late 2024, setting the stage for vacancy to stabilize.
Project Timelines and the SOFR Influence
Over 80% of unleased industrial projects under construction began before August 2023, coinciding with the peak of the Secured Overnight Financing Rate (SOFR). Additionally, rising interest rates led to a reduction in industrial projects starting in early 2023, hitting 10-year lows in the second half of the year.
Impending Drop-off in New Additions
The fact that over 80% of unleased industrial projects have been in progress for more than five months is crucial. Furthermore, the average development time for large U.S. industrial projects is 14 months, over three-quarters of ongoing projects are expected to deliver in the first half of 2024. The impending drop-off in new additions to the industrial supply indicates potential stabilization or tightening of the U.S. industrial vacancy.
Signs of Tenant Demand and Recovery
While a modest increase in tenant demand by the end of 2024 could stabilize or tighten the U.S. industrial vacancy, early signs are emerging. Tenants are looking to rebuild inventory levels and expand distribution center networks, especially with lean retail inventories and a leveling off of import declines.
The Onward Real Estate Team
At the Onward Real Estate Team, we go beyond transactions; we build relationships. Whether you’re buying, selling, or simply seeking the latest industry updates, we’re here for you. Count on us for unparalleled real estate support and timely news. Your journey with Onward is more than a transaction; it’s an ongoing partnership.