The Industrial Outlook: Normalization and Stabilization
During the early 2020s, the industrial sector was characterized by rampant tenant demand, record-high construction and deliveries, tightening vacancy rates and skyrocketing absorption.
But things change. The Q4 industrial reports pointed to reduced absorption, declining construction starts and increased vacancy rates due to supply currently wending through the pipeline. What will 2024 bring? According to CommercialEdge: “The current year will likely be a year of stabilization and normalization for the sector.”
A Look Back
“Following two years of white-hot demand for industrial space, supply and demand fell out of balance during 2023,” according to Colliers. Delving more deeply into the 2023 rear-view mirror, the reports all had the same themes. Specifically:
Decreased annual leasing activity
Reduced net absorption
Falling construction starts
“Concerns about the economy, interest rates and consumer activity spending caused many industrial real estate occupiers and investors to curb their activity last year,” CBRE observed. Lee & Associates concurred, pointing out that declining imports, surplus inventories and reduced sales in hard goods and building materials (due to a slump in home sales) didn’t help.
But even as vacancies edged upward and absorption came down, “occupancy remains tight as the vacancy rate resides 180 basis points lower than the 10-year pre-pandemic historical average of 7%,” Cushman & Wakefield said.
The Crystal-Ball Forecast
Most of the reports predicted that vacancy rates would increase, at least through the first half of 2024, “even though construction starts fell to a 10-year low,” Lee & Associates said. Still, Plante Moran pointed out that new deliveries will be a factor during the next six to nine months. “Risk of oversupply is most prevalent in properties of 500,000 square feet or larger, as speculative developers sought to scale efficiencies through major construction,” Plante Moran added.
Cushman & Wakefield and Colliers forecast a 6% and higher vacancy rate as consumer demand for goods cools down. Colliers also anticipates slowing economic growth, though moderating inflation and a less aggressive approach from the Federal Reserve “resulted in cautious optimism and less concern for a recession.” Still, as the construction pipeline shrinks, some markets could “become supply constrained in 2025 as absorption starts to regain momentum,” Cushman & Wakefield said.
As such, though 2024 is likely to be an occupier market, don’t expect it to stay that way for long. Savills anticipates that the main driver of tenant demand should remain strong while “manufacturing comeback is poised to lead the next cycle’s expansion.”
But not just yet. While CommercialEdge said that manufacturing reshoring and nearshoring will have a long-term impact on the industrial sector, “many of those impacts will not yet be seen in 2024.”
Connect Industrial Midwest 2024 will take place on March 5, 2024, at Joe’s Live in Rosemont, Illinois. Click here for more information and to register.
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