Industrial Pipeline Slows as Deliveries Continue to Outpace Construction Starts

Key Takeaways:

• Construction starts fall to half of deliveries during the first half of 2024, with 97.8 million square feet starting and 209 million square feet completed
• Nationwide, 375.7 million square feet of industrial space was under construction 
• National industrial in-place rents averaged $8.04 per square foot in June, up 7.5% year-over-year 
• The national vacancy rate stood at 6.1%, up 50 basis points month-over-month 
• Industrial transactions totaled $25.1 billion through the first half of the year at an average of $139 per square foot 
• Orange County remained the priciest industrial market, with average in-place rents at $15.69 per square foot in June 
• Kansas City had the slowest rental growth nationwide, with average rents rising 2.5% year-over-year 
• Dallas-Fort Worth continued to lead the South in development with a 15.7-million-square-foot pipeline
• Boston saw the highest vacancy rate among top U.S. industrial markets, at 8.8% as of June

Trends & Industry News

Industrial Outlook Solid Despite Slower Development 

Following two years of record-level deliveries, the industrial development pipeline has slowed in recent quarters. The amount of new stock coming to market will decline during the next couple of years, but the long-term outlook for industrial development remains bright, according to our latest U.S. industrial market report. 

The size of the industrial supply pipeline has shrunk for six straight quarters as deliveries have outpaced starts. More than 1.1 billion square feet began construction between 2021 and 2022, but starts fell to 357.5 million last year.

Through the first six months of 2024, only 97.8 million square feet have started. This represents a significant decline from year-ago levels when 147 million square feet broke ground. The comparison is even more stark when looking back to 2022, when construction starts reached 313 million square feet in the first half of the year. This slowdown has been driven by normalizing tenant demand, the record level of new supply recently delivered or set to be delivered, higher costs of construction loans and economic uncertainty. 

Construction: Deliveries vs Starts (Million Sq. Ft.)

Meanwhile, construction deliveries have shown a significant increase, rising from 160 million square feet in the first half of 2022 to 209 million square feet completed through June 2024. This growth underscores the market’s capacity to bring projects to completion despite the decline in construction starts. 

The reshoring of manufacturing will significantly impact the industrial real estate supply over the long run. Many projects that have broken ground in recent years are manufacturing facilities. According to our data, between 2018 and 2021, manufacturing accounted for 7-8% of the square footage started annually. In 2022 and 2023, manufacturing’s share jumped to more than 13%, and so far in 2024, it accounts for 16.1%.  

Data from the Census Bureau confirms this surge in manufacturing development. In May, annualized construction spending on manufacturing facilities totaled $234.1 billion. This is more than double the amount from two years prior and triple spending in May 2021. However, the rapid pace of growth appears to be over, as May’s figure was up 20.3% year-over-year and 1.3% month-over-month.  

Manufacturing returning stateside will propel the industrial sector forward, mainly because much of this spending is on semiconductor plants, allowing additional advanced manufacturers to set up shop in the U.S. The ripple effects from the current spending boom will be felt throughout this decade.  

If you are looking for a bright spot for construction starts, manufacturing would be the subset to focus on.

Peter Kolaczynski, Director, CommercialEdge 

We anticipate that the new development pipeline will grow again in the next few years, albeit not at the historical levels recently seen. Developers remain interested in adding new industrial space, as evidenced by the planned portion of the pipeline, which currently stands at 561.2 million square feet.  

Once the market absorbs the recently completed stock and the cost of capital begins to decrease, we expect many of these projects to see shovels in the ground. Manufacturing, data centers and the long-term shift to e-commerce and omnichannel retail continue to be positive drivers for industrial development, based on our industrial property outlook. 

Rents and Occupancy

Rent Growth in the Midwest Still Sluggish 

National in-place rents for industrial space averaged $8.04 per square foot in June, an increase of four cents from May and up 7.5% over the past 12 months, our U.S. industrial market report reveals. 

The Inland Empire continued to lead the nation for rent growth, with in-place rents increasing 12.5% year-over-year, followed by Los Angeles (12.0%), Miami (10.8%) and New Jersey (9.6%).  

The Midwest continued to see the slowest rent growth, with in-place rents rising 2.5% in Kansas City year-over-year, 3.4% in St. Louis, 3.6% in Detroit and 4.0% in Chicago. Absent the supply constraints placed on port markets, new supply is responsive to increasing demand in the middle of the county. This suppresses rent growth and prohibits owners from capturing the eye-popping rental growth rates seen along the coasts.  

Average Rent by Metro 

The national vacancy rate was 6.1% in June, up 50 basis points from the previous month. Industrial vacancy rates continue to move upward due to slowing demand and a historic wave of new supply hitting the market. 

The average rate for new leases signed in the past 12 months was $10.56 per square foot, $2.52 more than the average for all leases. The largest premium for a new lease was in Miami, where a new lease costs tenants $5.78 more per square foot than the market’s average for all leases. Los Angeles ($4.24 per square foot), Bridgeport ($3.86) and Dallas-Fort Worth ($3.73) also had substantial premiums for new leases. 

Conversely, Midwestern markets had some of the lowest premiums, with new leases costing $0.20 more in St. Louis than the market average, $0.68 in Kansas City, $1.26 in the Twin Cities, $1.30 in Cincinnati and $1.31 in Chicago. 

Supply

Slowdown in Construction Starts After Record-Level Supplies 

Across the U.S., 375.7 million square feet of industrial space was under construction as of June, representing 1.9% of stock, according to our U.S. industrial market report. An additional 561.2 million square feet are currently in the planning stages of development.  

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

After a period of blistering supply growth, the Dallas-Fort Worth pipeline appears to finally be hitting the brakes. The market has delivered 126.4 million square feet of new industrial supply since the start of 2022, growing the market’s stock by 13% over the last 10 quarters. As of June, 15.7 million square feet were under construction, accounting for 1.6% of existing inventory.  

Remarkably, the vacancy rate in Dallas-Fort Worth sits at 6.5%, even after adding so much new stock. We expect development in the market to pick up again once the new stock is absorbed and the cost of financing construction loans decreases. While the boom seen in recent years will not be replicated, Dallas-Fort Worth is poised to continue expanding in the coming years due to in-migration and the nearshoring of manufacturing, our industrial property outlook indicates. 

Transactions

Southern California Still in Demand 

Industrial sales totaled $25.1 billion through the first half of the year, with properties trading at an average of $139 per square foot. Demand for industrial assets remained strong, with the average sale price of an industrial property up 12.9% over 2023, according to our industrial property market report. 

2024 Year-to-Date Sales (Millions) 

Southern California has been the most in-demand region for industrial real estate during this decade, mainly due to the Ports of Los Angeles and Long Beach being the two busiest in the nation. Earlier this year, Rexford paid $1 billion for 3 million square feet across 48 properties in Los Angeles and Orange County.  

While the Inland Empire has seen a surge of new supply in recent years, Los Angeles and Orange County are very constrained by the availability of land. According to reports, the properties that Rexford acquired are 98% occupied, a figure which is unlikely to decrease given the state of those two markets. 

Western Markets

Bay Area Stays the Prime Market for Industrial Investments 

The Bay Area continues to stand out as a hotbed for industrial investment, leading the nation in sales volume and prices, logging almost $2.3 billion in transactions through June at an average price of $570 per square foot. The market also ranked third across the U.S. in average rental rates, at $13.34 per square foot. Although not historically an industrial real estate hub, the wave of new technological developments and the unique talent pipeline in the area has driven to a spike in demand for advanced manufacturing space.  

These facilities mainly cater to companies in the clean tech, electric vehicles and AI industries, benefiting from the proximity to tech firms in the Bay Area. As highlighted by Bisnow, one of the most notable industrial transactions in the market is server manufacturer Supermicro’s acquisition of a 292,000-square-foot facility for $80 million.  

Development in the Bay Area is also on an upward trajectory, with over 4 million square feet of industrial space underway as of June, which includes roughly 1.2 million square feet dedicated to advanced manufacturing facilities. This expansion is expected to continue steadily over the coming years to satisfy increasing demand, our industrial property outlook suggests. 

Continuing the trend observed throughout 2023, Phoenix remained the top market for industrial development in the U.S., with over 39 million square feet of space under construction as of June, accounting for 9.8% of existing stock. In contrast, Orange County continued to have the second-slowest development pipeline nationally due to a lack of land availability, with only 481,809 square feet in progress. 

West Regional Highlights 

Southern California has emerged as the most sought-after region for industrial real estate throughout this decade. The presence of the nation’s two busiest ports, Los Angeles and Long Beach, along with the region’s large population, have driven demand for warehouse, distribution and manufacturing facilities.  

Due to this demand, Los Angeles, Orange County and Inland Empire have been at or near the top of in-place rent growth for years. The Inland Empire led the nation in rental growth in June, with in-place rents up 12.5% year-over-year, followed by Los Angeles’ notable surge of 12.0%.  

The Western port markets also continued to see some of the highest asking rents nationwide. Orange County remained the priciest among top U.S. industrial markets, with average in-place rents at $15.69 per square foot, an 8.6% increase in the past 12 months. Los Angeles was next, with an average of $14.80 per square foot, while the Inland Empire had an average of $10.25 per square foot, placing the market eighth nationwide and fifth in the West. 

Even as industrial vacancy rates have crept upward in these markets due to normalizing tenant demand, properties in the region remain highly sought after by investors. Following the Bay Area’s leading sales price, Orange County ($340 per square foot) and Los Angeles ($311 per square foot) rounded out the top three nationwide. What’s more, Los Angeles had the second-largest sales volume in the region, with investors closing nearly $1.6 billion in industrial transactions. The Inland Empire recorded deals worth $893 million, while Orange County had a sales volume totaling $651 million. 

Year-To-Date Sale Price Per Square Foot  

This year, Rexford invested $1 billion to acquire 3 million square feet across 48 properties in Los Angeles and Orange County. While the Inland Empire experienced a surge in new industrial space in recent years, with 1.4 million square feet under development as of June, Los Angeles and Orange County continue to face significant challenges due to limited land availability. The properties purchased by Rexford boast a 98% occupancy rate, a figure unlikely to decrease due to the tight market conditions. 

Midwestern Markets

Kansas City Development Activity Still Strong 

The Midwest continued to offer some of the most affordable rental rates, with all markets recording asking rents below the national average of $8.04 per square foot. The Twin Cities came the closest to the national figure, with in-place rent at $6.99 per square foot, followed by Detroit at $6.89 per square foot. On the other end of the spectrum, Indianapolis ($4.74 per square foot), St. Louis ($4.83) and Kansas City ($4.88) were among the top four most affordable industrial markets in the U.S., surpassed only by Memphis with $3.98 per square foot. 

Columbus remained the tightest industrial market in the Midwest, with 3.7% space available for lease as of June, overtaken nationally only by Bridgeport, with a 3.5% vacancy rate. Logistics hub Columbus also recorded the most significant rental growth in the Midwest, with in-place rents increasing 7.9% year-over-year to $4.94 per square foot. The metro saw a lease spread of $2.22, with new leases signed at $7.16 over the past 12 months. 

Kansas City’s vacancy rate rose to 4.0%, up 20 basis points from last month. Despite healthy demand, rent growth stayed the slowest among top U.S. industrial markets, with in-place rents increasing 2.5% year-over-year, followed by St. Louis with (up 3.4%), Detroit (up 3.6%), and Chicago (up 4.0%). 

Midwest Regional Highlights 

Kansas City continued to lead the Midwest in industrial construction, with 13.2 million square feet underway, equal to 4.6% of its existing inventory. This makes it the second most active market in industrial construction across the nation on a percentage-of-stock basis, following Phoenix. Considering planned projects as well, Kansas City is set to expand its footprint by 17% in the future, our industrial property outlook anticipates. The extent to which that materializes will depend on how interest rates evolve in 2024 and beyond.  

Meanwhile, Chicago logged the largest sales volume in the region, with industrial investments amounting to $1.3 billion through the first half of the year. The Twin Cities followed with the second-largest transaction volume, closing deals worth $618 million, while Columbus ranked third , with sales totaling $334 million.  

Regarding sale prices, none of the Midwestern markets hit the $100-per-square-foot mark. The closest was Chicago, with an average sale price of $98 per square foot, well below the $139 per square foot national average. Sale prices in the Twin Cities saw a slight decline in June, falling from $104 per square foot in May to $95 per square foot month-over-month. 

Southern Markets

Dallas-Fort Worth Pipeline Growth Stalls 

Following a period of rapid supply growth, the construction pipeline in Dallas-Fort Worth is finally slowing down. Since the beginning of 2022, the market has added 126.4 million square feet of new industrial space, increasing the market’s stock by 13% over the last 10 quarters.  

In June, the metroplex had the second-largest industrial pipeline across the U.S., with 15.7 million square feet underway, equal to 1.6% of its inventory. This is a substantial reduction from year-ago figures when 52.7 million square feet were under development. Despite the significant influx of new stock, the vacancy rate in Dallas-Fort Worth was 6.5%, an increase of 120 basis points month-over-month.  

Texas is the fastest-growing state in the nation, adding nearly half a million residents in 2023, driving demand for industrial space. Perhaps more crucially, Dallas-Fort Worth’s location makes it a fundamental hub for imported goods manufactured in Mexico. With more than 43 million square feet in the planning stages, it won’t be long before the metroplex’s pipeline begins to grow again. Industrial market outlooks anticipate that development in Dallas-Fort Worth will resume once the newly added stock is fully absorbed and the cost of financing construction loans decreases, although the explosive growth of recent years is not expected to be repeated.  

South Regional Highlights 

Dallas-Fort Worth also led the South in industrial sales, closing deals worth over $2 billion during the first half of the year, the second-biggest sales volume nationwide, surpassed only by the Bay Area. Regarding sale prices, Nashville led the region, with properties trading at an average of $153 per square foot, closely followed by Dallas-Fort Worth with an average of $152 per square foot. 

Miami remained the priciest industrial market in the South, with in-place rents averaging $11.57 per square foot. The market also had the most robust rent growth, recording a 10.8% year-over-year surge. At the same time, new leases inked over the past 12 months averaged $17.35 per square foot, $5.78 more than in-place rents, the widest lease spread across leading U.S. industrial markets. Miami remianed one of the most in-demand markets in the South, with a vacancy rate of only 4.6%, below the national average of 6.1%. 

Charlotte became the tightest industrial market in the South, with 3.8% vacant space as of June, while Nashville followed with a 4.2% vacancy rate. In contrast, Houston posted the highest vacancy rate among Southern markets, with 7.4% of its space available for lease in June.  

Northeastern Markets

Boston Posts Highest U.S. Vacancy Rate 

New Jersey and Boston remained the priciest industrial markets in the Northeast, with double-digit asking rents, although beneath the rates recorded in California and Miami. In June, New Jersey rents stood at $10.85 per square foot, while in-place rents in Boston were $10.68 per square foot. The markets also saw the highest growth in the region, with rents in New Jersey rising 9.6% year-over-year and 7.7% in Boston, respectively. Philadelphia stood out as the only Northeastern market with an average rental rate below the $8.04 national average, at $7.79 per square foot. Here, rents increased 5.8% year-over-year. 

The most considerable lease spreads in the region were recorded in Bridgeport, with new leases signed at $3.86 more than in-place rents over the past 12 months, averaging $13.05 per square foot, our industrial property market report shows. Boston followed, with tenants paying $3.55 more for new leases, which averaged $14.23 per square foot as of June.  

Northeast Regional Highlights 

Regarding industrial space available for lease, two Northeastern markets stood out — Boston, which had the highest vacancy rate nationwide at 8.8%, and Bridgeport, the tightest industrial market across the U.S., with 3.5% vacant space. With only 231,000 square feet of industrial space under development as of June, Bridgeport faces significant pressure to accommodate growing demand, resulting in increased competition for available space.  

A notable increase in vacant space was recorded in New Jersey, where the vacancy rate rose 140 basis points to 7.1% from month-ago figures in June. 

Philadelphia continued to lead the Northeast in terms of supply, with nearly 8.9 million square feet of industrial space underway, representing 2.0% of total stock. Despite a slowdown in construction compared to year-ago levels, when 20.2 million square feet were underway, demand for industrial space in Philadelphia has remained solid, with only 5.2% available space for lease as of June.  

New Jersey remained the leader in the region in sales volume, with $1.06 billion in closed industrial deals through June. The market also claimed the region’s highest sale prices, with properties trading at an average $256 per square foot.   

Economic Indicators

Producer Prices Tick Upwards 

Producer prices increased by 0.2% in June and 2.6% year-over-year, according to the Bureau of Labor Statistics. The Producer Price Index (PPI) was driven by gains in the Final Demand for Services portion of the index, which increased by 3.5% over the year and 0.6% in the month. The Final Demand for Goods portion of the index rose just 1.1% year-over-year and decreased by 0.5% in June. 

Economic Indicators

For now, a slight uptick in producer prices should not alter expectations that the Federal Reserve will begin cutting interest rates this fall. Increases in the prices paid by both producers and consumers have stabilized over the last year, although all metrics of inflation, including the Fed’s preferred measure of personal consumption expenditure (PCE), remained slightly above the central bank’s target rate of 2%. June marked the largest year-over-year increase of the PPI in 15 months, and the index bears monitoring as it can be a leading indicator of the increases in other indices. 

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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.   

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