Industrial vacancy is beginning to plateau as new construction slowed to its lowest level since early 2021, according to Colliers’ third-quarter industrial report and outlook. Seventy-six million square feet of industrial construction was completed during the quarter, the lowest since the first three months of 2021, and quarterly construction completions are expected to continue to fall over the next few quarters.
The industrial pipeline peaked at 711 million square feet during the fourth quarter of 2022, according to Colliers. Total space under construction has since dropped 53% to 331 million square feet and is expected to fall even lower during the next six months.
Vacancy increased by only 19 basis points to 6.6% during the quarter, the smallest quarterly spike since it began to rise in late 2022 and was highest in markets with the most new supply over the past several quarters. The category increased the most in the West region – 256 basis points – and the least in the Midwest – 57 basis points. Vacancy is expected to peak around 6.8% during the first half of 2025 and then gradually decrease as new supply and tenant demand return to balance.
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A recent uptick in new leasing activity will translate to a bump in demand during the fourth quarter and into 2025, said Colliers. Demand as measured by net absorption of 39 million square feet in the third quarter brought the year-to-date total to 115 million square feet.
According to Colliers, 35% of tenants moved into spaces that are 500,000 square feet or larger during the third quarter, nearly half of which were third-party logistics providers or packaging users. Going forward, new occupancies are likely to come from manufacturing, data centers, food and beverage, and general retail users. A bump in demand from these new users is expected during the fourth quarter and into early 2025.
Average asking rental rates for industrial increased 9% year-over-year. Rent growth in most markets has normalized at closer to historical averages of between 2% and 7% year-over-year, although in 15 markets average rents declined year-over-year, most notably in coastal markets where rents grew more quickly over the past few years. More rent growth is forecast for 2025 and 2026, although more in line with historical averages, said Colliers.
Investment activity in the sector also could increase next year with more clarity on interest rates, the report said.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
