Following more than two years of unparalleled demand in industrial markets throughout the U.S. that pushed vacancy rates to new lows and developers to build more product than ever, market indicators have started to shift. Demand as measured by net absorption has fallen more than 50% year-over-year during 2023, normalizing to levels witnessed prior to the pandemic between 2017 and 2019. New supply has reached a new high for the past two quarters in a row, and vacancy rates are climbing in nearly all markets and regions as a result. While this imbalance between supply and demand will continue to push vacancy higher in the near-term, a drop in construction starts and steady demand point to the equilibrium returning to the industrial market during the second half of 2024. As we celebrate the holidays and 2023 winds down, below are some key trends to watch in the industrial sector and its outlook for 2024.
Trends to Watch in 2024
Following more than two years of unparalleled demand in industrial markets throughout the U.S. that pushed vacancy rates to new lows and developers to build more product than ever, market indicators have started to shift.
- Manufacturing Reshoring: While speculative development of warehouse and distribution facilities is quickly dropping, manufacturing construction spending has never been higher. Manufacturing reshoring has accelerated impressively during the past two years with the CHIPS Act, primarily catalyzed by rising tensions with China and supply chain concerns. While most development has been concentrated in semiconductor and electric vehicle battery facilities, it is also increasing for food and beverage processing, chemicals, and plastics factories.
- Data Center Growth: The rapid expansion of data center facilities in key markets around the U.S. will continue in 2024 as the industry adjusts to accommodate a new era of data center demand and the rise of artificial intelligence. Power grids must be modernized to support the significant power needs of tomorrow’s data centers, including more transmission lines while adding multiple energy sources.
- Cold Storage Demand: The U.S. cold storage market’s size is expected to more than double by 2030. Much of the existing cold storage inventory is 30 to 40 years old and functionally obsolete, but vacancies hover between 3% and 4%. In some large cold storage markets, there is essentially no vacancy, so developers and investors have started to recognize the opportunity in the niche asset class. Development of cold storage facilities is expected to expand further in 2024, including several speculative buildings.
- Supply Chain Restructuring: Third-party logistics (3PL) providers continued to expand during 2023, to nearly one-third of new bulk occupancies. While many companies may outsource their logistics operations to a 3PL provider in 2024, others will reevaluate their in-house strategies, implementing micro-fulfillment centers in cities across the U.S., adjusting fulfillment setups, and taking omnichannel approaches — all of which affect real estate.
- Vacancy: Industrial vacancy rates are poised to rise further through much of 2024 in all regions and most markets as new supply outstrips demand. The vacancy rate is forecast to stabilize at around 6.5% during the second half of 2024, a functional rate slightly above its 15-year average of 6.2%. In markets receiving a significant amount of new product relative to the overall industrial inventory, vacancy may exceed 10%; it will remain below 5% in markets with less development due to geographical constraints or other factors.
- Demand: Occupancy growth normalized to pre-pandemic levels during 2023, more than 50% lower than in 2021 and 2022, when industrial occupiers were expanding at an unprecedented pace nationwide. Net absorption is expected to hold between 40 and 60 million square feet per quarter through 2024, in sharp contrast to the nine consecutive quarters of more than 100 million square feet of absorption quarterly between late 2020 and 2022. Despite the pullback, this is in line with demand prior to the pandemic, and the balance between supply and demand is expected to return towards the end of next year.
- Construction: While developers are still completing more industrial facilities than ever, construction starts have fallen dramatically and the construction pipeline has started to contract. With the cost of capital high, demand slowing, and vacancy rising, developers will focus on build-to-suit projects and specialty facilities, including cold storage, manufacturing, and data center development. This respite in speculative development will allow time for industrial occupiers to absorb much of the modern space being completed.
- Rents: Average lease rates continued to climb during 2023, exceeding 15% year-over-year growth in many markets. While rent growth may pause in some markets where rates got a bit out of hand, 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%.