Industrial vacancy rates are rising more gradually across the country as the construction pipeline thins to below pre-pandemic levels, creating stability between supply and demand. By the end of this year, vacancy should peak, according to Colliers' industrial outlook.
Vacancy increased slightly by 14 basis points to 7.1% during the first quarter, the smallest three-month increase since the fourth quarter of 2022. However, that bump put the rate at its highest level since 2015, as new supply has outpaced demand over the past 11 quarters.
Vacancy is the highest in the South, up 94 bps to 8.3% year-over-year, while it is the lowest in the Midwest at 5.4%, an increase of only 11 bps in the past year. The West experienced the greatest year-over-year increase at 158 bps to reach 7.1%. In Charleston, strong new supply pushed vacancy to 21%, the highest among regions in the country.
Construction completions dropped to 65 million square feet during the first quarter, the lowest total since Q1 2019. That is about 60% below the peak of 163 million square feet in the third quarter of 2023, according to Colliers. Demand as measured by net absorption fell to 35 million square feet, 34% below last quarter, but still 12% higher than in the first quarter last year and net absorption is expected to remain positive through the end of this year.
The supply/demand balance has already returned to some markets, particularly in the Midwest. Salt Lake City, Omaha, Chicago and Kansas City all have observed demand outpacing new supply since the start of 2024, said the report.
Total space under construction declined to 279 million square feet, the lowest level since 2018 and 61% below the 711 million square feet peak at the end of 2022.
“The construction pipeline is projected to shrink further to around 250 million square feet by the end of 2025, as many developers put their projects on hold, delaying the next wave of speculative construction until vacancy rates begin to fall again and economic clarity emerges,” said Colliers.
Rent growth varied from market to market but is expected to stabilize this year, according to Colliers. Average warehouse and distribution rents grew by 6% year-over-year to $10.65 per square foot. Rents decreased in 28 markets over the past year, falling the most in coastal areas with the highest rent growth over the past few years. Average warehouse/distribution rents declined the most in the Inland Empire, by 21% over the past year.
Looking ahead, economic indicators continue to point to a relatively strong U.S. economy despite rising recession concerns and negative GDP growth in the first quarter. In the industrial market, leasing activity has slowed, with many tenants opting for short-term renewals or pausing space requirements.
“Slower leasing velocity will lead to dampened industrial demand, which may be exacerbated by an extended period of uncertainty,” said Colliers. “Once economic and trade policy clarity returns, a period of pent-up demand is expected, returning the U.S. industrial market to a steady growth mode. While many industrial users most exposed to global trade may be reassessing supply chain strategies and postponing real estate decisions, the outlook for the U.S. industrial market remains bright, particularly in markets important to local and regional distribution.”
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