Industrial Construction Continues to Level Off Amid Normalizing Demand and High Interest Rates 

Key Takeaways: 

• National industrial in-place rents averaged $7.74 per square foot in January, up 7.6% year-over-year
• The national vacancy rate stood at 4.8%, up 20 basis points month-over-month
• Nationwide, nearly 425 million square feet of industrial space was under construction
• Industrial transactions totaled $2.6 billion through January, at an average sale price of $145 per square foot
• The Inland Empire remained the leader in rent growth, with average rents rising 12.9% year-over-year in January
• Chicago kickstarted the year with the largest sales volume nationally, totaling $243 million
• Miami saw the third-highest rent growth in the nation, reaching 11.4% as of January
• Philadelphia led the Northeast in development, with 7.8 million square feet underway as of January

After record levels of new supply have been delivered in the previous two years, the industrial new supply pipeline is undergoing a rebalancing, with new deliveries expected to fall in coming years, according to our latest U.S. industrial market report. More than 1.1 billion square feet of new industrial space (5.7% of the stock) has been completed since the start of 2022, a rate which wasn’t sustainable over the long run, but which has helped ease the pressure in some industrial markets that were experiencing extremely tight vacancies coming out of the pandemic. The national vacancy rate currently sits at 4.8%, an increase of 80 basis points over the last 12 months.

“Stabilizing construction deliveries and start volume are healthy market responses to what has been happening over the last three years. We believe demand will remain strong, allowing for a boost in construction starts over the next few years.”

Peter Kolaczynski, Director, CommercialEdge

New industrial starts in 2023 totaled 314.6 million square feet, down significantly from the 593.2 million square feet in 2022 and the 557.4 million square feet in 2021.

Normalizing demand for industrial space and record levels of new deliveries were the main drivers of this cooling, but interest rate increases, general economic uncertainty and banks pulling back on construction loans have all played a significant role as well.

While the supply boom is cresting, we anticipate construction starts to pick up again once interest rates come down and the industrial sector has had time to fully reckon with the impact of historic levels of new development. New computer chip manufacturing facilities will allow for more advanced manufacturing to occur stateside, spurring development near chip plants and beyond. Further, while 2023 starts fell by more than 40% from 2022 and 2021 levels, they were still significantly higher than the pre-pandemic years, indicating continued demand for new space.

Rents and Occupancy: Potential Supply Chain Disruptions on the Horizon

National in-place rents for industrial space averaged $7.74 per square foot in January, an increase of four cents from December and up 7.6% year-over-year, our latest U.S. industrial report shows. The average rate for new leases signed in the last 12 months rose to $10.12 per square foot in January, $2.38 more than the average for all leases. At the same time, the national industrial vacancy rate was 4.8% in January, up 20 basis points from the previous month.

Average Rent by Metro

Our industrial property outlook predicts that rent growth will cool this year as demand for industrial space continues to wane and the record level of new supply delivered over the last two years becomes fully absorbed. However, the long-term drivers for industrial real estate remain positive, and rent growth should remain solid even amid headwinds faced by the sector.

Port backlogs have dissipated as supply chain pressures have eased, with most ports now processing container volumes similar to pre-pandemic levels. However, potential disruptions loom, including reduced water levels in the Panama Canal due to drought and the risk of cargo ship attacks in the Red Sea, which could impact supply chain stability, industrial property outlooks suggest.

Supply: Starts Down Across the Board

Nationally, 424.5 million square feet of industrial space were under construction as of January, representing 2.2% of stock, our U.S. industrial market report reveals. The under-construction pipeline has shrunk by roughly 300 million square feet over the last year due to a slowdown in construction starts driven by falling demand and a rising cost of capital.

Construction starts have fallen in response to changing conditions, but the effects are not equal across all markets. Among the top 30 U.S. industrial markets, Memphis saw the largest decline from 2022 to 2023, with construction starts falling from 12.3 million square feet to 1.1 million.

National Industrial Supply Pipeline Trend (Million Sq. Ft.)

Other notable declines included Denver, with construction starts falling 78% from 12.3 million square feet to 2.7 million square feet, followed by the Inland Empire, down from 29.3 million square feet to 6.7 million square feet. Cincinnati and Philadelphia saw their construction starts shrink by 77% and 72% from 2022 to 2023.

The Inland Empire faced the most considerable reduction in absolute terms, with a 22.5 million square feet decrease between 2022 and 2023. Significant drops were also seen in Dallas (down 19.6 million square feet), Philadelphia (14.8 million square feet), and Chicago (14.3 million square feet).

In contrast among the top 30 U.S. industrial markets, only Boston and Bridgeport recorded increases in construction starts last year, with Boston going from 2.1 million square feet to 3 million square feet and Bridgeport from 1.2 million square feet to 2.9 million square feet.

Transactions: Sales Activity Off to a Slow Start in 2024

Nationwide, industrial sales totaled $2.6 billion in the first month of 2024, with properties trading at an average of $145 per square foot, according to our U.S. industrial market report.

Chicago led the nation in sales volume with $243 million. Since the beginning of 2021, the Chicago industrial market— the largest in the U.S. — has expanded by 84.1 million square feet, representing 8.1% of its total stock.

2024 Year-to-Date Sales (Millions)

This influx of new supply contributed to keeping the growth of sales prices in check. In the Windy City, the average sales price rose by 22%, from $75 to $91 per square foot between 2019 and 2023. However, compared to other major markets that also experienced significant increases in supply, Chicago's price growth was modest. For the same period, Atlanta's average sales price increased by 68%, Dallas-Fort Worth’s by 84% and the Inland Empire’s by 106%.

Western Markets: Southern California Rent Growth Remains Undeterred Amid Higher Vacancies

With record levels of new supply delivered in the previous two years and the normalizing demand for industrial space, Southern California markets have also experienced a slight shift in market dynamics. The Inland Empire’s vacancy rate rose to 5.1% in January 2024, above the 1.6% recorded during the same period last year.

Similarly, the industrial vacancy rate in Los Angeles increased to 5.6% in January 2024, above the 2.8% logged in January 2023. At the same time, Orange County’s vacancy rate stood at 4.9% at the beginning of the year, above the 3.3% recorded during the same time last year.

Despite rising industrial vacancy rates, Southern California saw the highest rent increases in the U.S., with the Inland Empire at the forefront with a 12.9% surge, Los Angeles close behind at 12.1%, and Orange County ranking fourth nationally at 9.8%, just after Miami's 11.4%.

West Regional Highlights

Outside Southern California, Seattle saw the largest rent growth, rising 9.4%, followed by Phoenix with an 8.6% increase. In contrast, Denver saw the slowest growth, with asking rents increasing just 5.2% year-over-year in January.

Western regions maintained their status as the priciest in the U.S. for industrial rents. Orange County topped the list at $14.95 per square foot, Los Angeles followed with $13.95, the Bay Area was next with $12.99, and Seattle logged $10.83 per square foot. The Central Valley, with $6.11 per square foot, stood out as the only Western region with rents below the national average of $7.74 per square foot.

Western markets also recorded some of the widest lease spreads across the U.S. In the Bay Area, new leases were signed at $18.81 per square foot — $5.82 more than in-place rents. Los Angeles and the Inland Empire also recorded notable premiums, with new leases signed over the past 12 months costing $5.79 and $5.73 more than in-place rents, respectively.

Looking at industrial development, Phoenix remained the unchallenged leader, with 41.6 million square feet of space under construction, accounting for 10.9% of existing inventory. In terms of square footage, Portland and Orange County had the lowest under-construction pipelines, with 1.5 million square feet and 432,959 square feet of industrial space underway, respectively.

Among western markets, the Bay Area logged the largest sales volume, logging $229 million in industrial deals through January. Denver recorded the next-largest volume in the region, with investors closing $210 million in sales. At the same time, the Bay Area and Los Angeles saw the highest average sale prices in the region, with properties trading at $319 per square foot and $290 per square foot, respectively.

Midwestern Markets: Chicago Leads Nation in Sales, Totaling $243 Million

Midwestern markets registered the lowest industrial vacancy rates across the U.S., with Columbus, Indianapolis and Kansas City all posting a rate of just 2.6%. Despite low vacancy rates, rent growth remained slower in the region, rising 6.4% in Columbus, 3.7% in Kansas City and 3.6% in Indianapolis, year-over-year in January.

Overall, the most notable rent growth in the Midwest was recorded in Columbus, followed by the Twin Cities, with a 5.5% growth and Cincinnati, with a 4.6% uptick.

Midwest Regional Highlights

At the same time, the highest in-place rents were recorded in Detroit, coming in at $6.83 per square foot, followed by the Twin Cities at $6.73 per square foot. In contrast, the most affordable rates were logged in St. Louis ($4.58 per square foot) and Indianapolis ($4.55 per square foot). On a national level, only Memphis recorded a lower lease rate, coming in at $3.86 per square foot.

On a percentage-of-stock basis, Kansas City had the largest under-construction pipeline among Midwestern markets, accounting for 3.9% of its total stock, followed by Columbus, with 1.7% of existing inventory under construction. In terms of square footage, Chicago led with nearly 12 million square feet of space under development.

Chicago also started the year by leading the U.S. in transaction volume, logging $243 million in sales through January. The notable sales activity in the area is largely attributed to LBA Realty's purchase of two properties near O’Hare Airport for $95 million, trading at an average price of $201 per square foot. These acquisitions encompass over 480,000 square feet dedicated to logistics and cold storage operations.

Southern Markets: Miami Logs Third-Highest Year-Over-Year Rent Growth in January in the U.S., Up 11.4%

Among leading Southern industrial markets, Charlotte and Nashville posted the lowest vacancy rates in January, at 3.3% and 3.4%, respectively. Atlanta and Dallas-Fort Worth followed with 4.2% and 4.5% of their space available for lease, respectively. In contrast, Tampa recorded the highest vacancy rate in the South, at 6%.

Meanwhile, Miami witnessed the third-highest year-over-year rent increase in the U.S. in January, with a growth of 11.4%, reaching $11.04 per square foot. In the South, the Dallas-Fort Worth Metroplex had the second-highest rent growth at 7.6%, with in-place rents settling at $5.83 per square foot. Atlanta followed closely, with rents rising 7.3% to $5.60 per square foot.

South Regional Highlights

Miami also led the South in lease premiums, with new leases inked over the past 12 months costing $16.08 per square foot, $5.04 above in-place rents. Similarly, tenants in Atlanta and Baltimore signed new leases at higher rates, paying premiums of $2.79 and $2.64 more than the current rents, respectively.

The Dallas-Fort Worth Metroplex led industrial development in the region in terms of square footage, with 28.6 million square feet of space underway as of January, equal to 3.1% of existing inventory. On a percentage-of-stock basis, Charlotte led development in the South, with projects underway accounting for 4% of existing inventory.

So far, Atlanta has logged the largest sales volume, totaling $112 million, with properties trading at an average of $111 per square foot. Houston followed, where transactions totaled $64 million through January, at an average of $128 per square foot.

Northeastern Markets: Philadelphia Leads Industrial Development in the Region, with 7.8 million Square Feet in the Pipeline

In the Northeast, Philadelphia recorded the lowest vacancy rate in January, with 4.4% of space available for lease across the market. It was followed by New Jersey at 4.6%, Bridgeport at 5.6% and Boston at 8.7%.

In terms of rent growth, New Jersey remained the leading market in the Northeast, with in-place rents increasing 9.1% year-over-year in January to $10.29 per square foot. Boston was next, with rents growing 7.3% to $10.32 per square foot. Philadelphia and Bridgeport also experienced increases, with rents rising to $7.62 per square foot (up 6.7%) and $8.97 per square foot (up 6%), respectively.

Northeast Regional Highlights

New Jersey also recorded the widest lease spread in the region, as new lease premiums here reached $3.67 per square foot. Overall, each market in the Northeast recorded higher rates for new leases, with a spread of $2.47 per square foot in Philadelphia, $2.00 per square foot in Bridgeport and a small amount of $0.98 in Boston.

Philadelphia continued to lead the Northeast in industrial development, with roughly 7.8 million square feet of space underway, accounting for 1.8% of existing inventory. In terms of square footage, Bridgeport had the smallest pipeline, encompassing 2.9 million square feet, representing 1.4% of total stock.

Sales activity remained muted in the Northeast at the beginning of the year. Boston and New Jersey were the only markets to record sales, with $103 million and $46 million in closed industrial deals, respectively.

Economic Indicators: Warehouse Employment Continues to Stagnate

In January, the Warehousing and Storage sector saw an increase of 5,500 jobs on a seasonally adjusted basis, according to the Bureau of Labor Statistics. However, this slight improvement is negligible considering the downward trend seen over the previous 18 months.

Since its peak in May 2022, the sector has experienced the loss of 163,200 jobs, a drop of 8.2%, with losses recorded in 17 of the last 20 months. This period of decline reflects a correction phase following rapid employment growth in 2020 and 2021.

The downturn in warehouse jobs coincided with Amazon scaling back its expansive growth during the pandemic. This included offering millions of square feet of space for sublease and postponing the completion of some construction projects. Given that Amazon is a major employer in this sector, its decision to sublease more space in November suggests that a significant rebound in warehouse employment is unlikely in the near future.

Download the complete February 2024 report for a full picture of how U.S. industrial markets evolved in January, including insights on industry indicators and economic recovery fundamentals.

You can also see our previous industrial reports.

Methodology

The monthly CommercialEdge national industrial real estate report considers data recorded throughout the course of 12 months and tracks top U.S. industrial markets with a focus on average rents; vacancies (including subleases but excluding owner-occupied properties); deals closed; pipeline yield; forecasts; and the economic indicators most relevant to the performance of the industrial sector.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Average Rents —Provided by Yardi Market Expert, a cutting-edge service that uses anonymized and aggregated data from other Yardi platforms to provide the most accurate rental and expense information available.
• Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of industrial space in that market. Owner-occupied buildings are not included in vacancy calculations.

Stage of the supply pipeline:

• Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.
• Under Construction — Buildings for which construction and excavation has begun.

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.   

Market boundaries in the CommercialEdge industrial report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources.