The pace of industrial vacancy in the United States has been slowing as a recent development boom winds down. The rate came 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 level since 2015, with the category increasing for 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. That all might seem like bad news, but over the past nine months, the 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 to 7.2%.
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Colliers said vacancy in markets near the coasts have climbed more rapidly during the past year, with Charleston reporting the highest 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,” Colliers said.
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, according to 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, and Phoenix, with 4.1 million square feet.
Total industrial space under construction declined during 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, according to 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.
