The pace of industrial vacancy in the United States has been slowing as a recent development boom winds down, coming in at 7.1% for the first quarter, an increase of only 14 basis points, according to Colliers’ Q1 industrial market statistics report. That is the highest vacancy rate since 2015, which has increased in the 11th consecutive quarter.
The industrial vacancy rate hit a bottom of 3.6% in 2022, followed by six quarters in which it rose more than 30 basis points. However, over the past nine months, that pace has slowed.
Vacancy was lowest in the Midwest at 5.4%, while it rose the most in the West, up 158 basis points year over year to 7.1%. Vacancy stood at 8.3% in the South, an increase of 94 basis points year over year, and was up 128 bps in the Northeast at 7.2%.
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Colliers said vacancy rates in markets near the coasts have climbed more rapidly during the past year, with Charleston reporting the highest vacancy rate in the country at 21%, up 814 basis points year over year.
New supply decreased to its lowest level in 2019, with about 65 million square feet of industrial space delivered during the first quarter and 35 million square feet absorbed. At its peak in the third quarter of 2023, 162 million square feet of industrial space were delivered.
“As the current development cycle winds down, new supply is expected to align more closely with demand, leading to a peak in vacancy rates,” said the report.
While economic uncertainty and ongoing ambiguity around tariffs may delay a significant rebound in demand over the coming quarters, net absorption is expected to stay in positive territory, said the report.
The Dallas/Ft. Worth market absorbed the most industrial square footage during the quarter, at 6.9 million square feet, followed by the Inland Empire, with 4.8 million square feet absorbed, and Phoenix, with 4.1 million square feet absorbed.
Total industrial space under construction also declined for the quarter to 279 million square feet, the lowest level since 2018. Construction starts remain limited, and the pipeline is expected to slow to around 250 million square feet by the end of this year.
Colliers said industrial construction has dropped in every region and nearly every market.
“Once confidence in renewed industrial demand and declining vacancy returns, a new wave of development is anticipated in balanced markets,” said Colliers.
The top five metros with industrial construction include Dallas/Ft. Worth, the greater Los Angeles area, Houston, Atlanta, and Phoenix.
Industrial rent growth slowed last year but remained positive, said Colliers. Overall warehouse and distribution rents grew by 6% over the past year to an average of $10.65 per square foot. Rents are expected to stabilize over the next few quarters until vacancy peaks and stronger year-over-year demand returns.
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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.
