Industrial Vacancies Normalize as High Inflation and Costs Slow Demand

Key Takeaways: 

• National industrial in-place rents averaged $7.96 per square foot in April, up 7.4% year-over-year    
• The national vacancy rate stood at 5.2%, unchanged month-over-month 
• Nearly 402 million square feet of industrial space was under construction nationwide 
• Industrial transactions totaled $15 billion through April, trading at an average sale price of $146 per square foot
• Leading Western markets logged nearly $6 billion in transactions through April, with the top two markets accounting for more than half of the volume
• Columbus was the tightest industrial market in April, with a vacancy rate of 2.7%
• New leases signed over the past 12 months averaged $17.36 per square foot in Miami, $5.97 more than in-place rents
• New Jersey recorded the highest rent growth in the Northeast, up 8.9% year-over-year

Trends & Industry News: Manufacturing Push Continues

The push to boost U.S. manufacturing, particularly for semiconductors and clean energy technology, has led to a boom in construction, but a true manufacturing resurgence remains years away, our latest U.S. industrial market report shows.

A manufacturing construction boom is underway, driven by manufacturers’ desire to strengthen supply chains and reduce dependency on outsourcing, along with two major pieces of legislation. The CHIPS and Science Act provided tax credits and incentives for the stateside production of semiconductors.

The Inflation Reduction Act included funding and tax credits for both producers and consumers of clean energy technology, given that the products were made in the U.S. According to the U.S. Census Bureau, annualized manufacturing construction spending reached $233 billion in April of 2024, a figure that has more than doubled in the last two years and nearly tripled in the last three.

As the industry works through the absorption of recently delivered warehouse/distribution space over the past few years, manufacturing construction is a bright spot in a market that has been challenged with high costs and expensive capital.

Peter Kolaczynski, Director, CommercialEdge

This wave of spending on manufacturing can be seen in CommercialEdge data as well, with manufacturing accounting for more than 30% (124.8 million square feet) of all space under construction.

While manufacturing construction has flourished, it has not yet translated into job gains like those that occurred in warehouse employment during the logistics boom. While the sector recovered from pandemic job losses, manufacturing employment has been stagnant for the last 18 months, and April 2024 was only 1.4% higher than February 2020 levels. This is likely due to, at least in part, the longer delivery times for these facilities, meaning many of the biggest projects have yet to deliver.

Restoring and protecting American manufacturing jobs in the current global economy was one of the chief reasons given by the Biden Administration when announcing new tariffs on clean energy and other technology imported from China. Plants that build solar panels, electric vehicles, batteries and semiconductors won’t create jobs if they are undercut by cheaper Chinese goods. The protectionism stance is also driven by concerns over national security, self-sufficiency and China’s dominance of the supply chains for critical materials. However, a clean-energy trade war with China may not be one that the U.S. can win, given that China controls an estimated 80% of the supply chain for the components of clean technology and has a big head start in global markets.

We anticipate that manufacturing will continue to drive a great deal of activity for industrial real estate, but it will be years before the impacts are fully seen, our industrial property outlook indicates. The new tariffs will increase the prices of clean energy technology for consumers but will be a positive for the industrial sector. Once projects are delivered, we expect manufacturing employment to rise and supplemental firms to take root as well.

Rents and Occupancy: Slowing Demand, New Supply Lead to Vacancy Rate Growth

National in-place rents for industrial space averaged $7.96 per square foot in April, an increase of 11 cents from March and up 7.4% over the last 12 months, our latest U.S. industrial market report reveals. The average rate for new leases signed in the last 12 months was $10.31 per square foot, $2.35 more than the average for all leases.

After a month in second place, the Inland Empire reclaimed the top spot for the highest rate of in-place rent growth, with rates increasing 12.5% over year-ago figures. Miami (up 12%) was the second fastest-growing market, followed by Los Angeles (11.2%), Orange County (9.4%) and New Jersey (8.9%).

Rent growth was slowest in Detroit (3% increase over the last 12 months), St. Louis (3.5%), Kansas City (3.6%) and Denver (4.1%).

Average Rent by Metro

The national vacancy rate was 5.2% in April, unchanged from the previous month. Industrial vacancies have mostly returned to a normalized level over the last year after a period of remarkable tightness that occurred following the pandemic. In April 2023, the national vacancy rate was 4.1%, and many of the tightest markets, like the Inland Empire, Los Angeles and New Jersey, were below 3%. Today, those three markets are at or near 6% vacancy.

Demand for space has slowed due to rising inflation, which has increased firms’ non-real estate costs and interest rate hikes, making capital more expensive for expansions. Simultaneously, a record level of new supply has been delivered to the market, putting upward pressure on industrial vacancy rates.

Supply: Port Market Pipelines Drying Up

Nationwide, 401.6 million square feet of industrial space was under construction as of April, representing 2% of existing stock, the latest industrial property market report shows.

New industrial starts continue to slow in 2024, with just 49.2 million square feet breaking ground through April.

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

Port markets continue to experience the most significant rent growth due to high demand for space and limited land for new development. Although vacancy rates in these markets have eased over the past 18 months, we expect rental rates to continue growing because new construction pipelines have slowed.

Among the top five markets for rent growth, only Miami, with 3.1% of its stock under construction, exceeds two percent. Los Angeles (0.3%) and Orange County (0.4%) have such small pipelines that they are almost negligible, given the market size, while New Jersey's pipeline is slightly larger at 1.3%. The Inland Empire’s pipeline, at 1.2%, has decreased significantly as a wave of new supply was delivered and new starts diminished. This time last year, the Inland Empire had 32.6 million square feet under construction, which has now shrunk to 8.1 million.

Transactions: Cold Storage Growing in Dallas

Industrial sales totaled $15 billion year-to-date through April, with properties trading at an average of $146 per square foot, according to our U.S. industrial market report. Average sale prices have remained elevated in the first four months of 2024, even as the number of sales and total sales volume are down from previous years.

2024 Year-to-Date Sales (Millions)

Dallas has been one of the most active markets for sales activity this year, with more than one billion in industrial transactions through April, giving it the third-highest sales volume in the country. Recently, Vertical Cold Storage, a developer and operator sponsored by Platform Ventures, purchased a 400,000-square-foot-cold storage facility in Burleson.

Dallas-Fort Worth has become a hub for refrigerated warehouses, with 3.7 million square feet of cold storage space delivered since the start of 2022, according to our database. No other market has completed even 1 million square feet of cold storage space during that period. We expect Dallas' cold storage prominence to continue growing in the coming years. Centrally located in a rapidly expanding region of the U.S., the metro is strategically positioned within 24 hours of about 40% of the country’s population, making it a crucial link in the food supply chain.

Western Markets: Southern California Continues to See the Most Robust Industrial Rent Growth in the U.S.

After being overtaken in rent growth by Miami in March, the Inland Empire returned to the top in April, with a year-over-year increase of 12.5%. Nonetheless, Miami remained the second-fastest-growing market, with a 12% surge over the past 12 months, outpacing Los Angeles (11.2%) and Orange County (9.4%).

Despite being surpassed by Miami in rent growth, Orange County and Los Angeles remained the priciest industrial markets in the U.S., at $15.37 per square foot and $14.32 per square, respectively. The Bay Area was next, with rents at $13.14 per square foot, and Seattle logged $11.07 per square foot. The Central Valley, with $6.20 per square foot, continued to stand out as the only Western region with rents below the national average of $7.96 per square foot.

West Regional Highlights

In terms of lease spreads, tenants in the Inland Empire and Los Angeles paid the highest premium in the West, with new leases signed over the past 12 months costing $5.11 and $4.61 more than in-place rents, respectively. Orange County and the Bay Area also saw notable premiums, with new leases inked at $18.21 per square foot and $15.87 per square foot, respectively — $2.84 and $2.73 more than in-place rents.

Although industrial vacancy rates have eased even in port markets, sitting at 6.2% in the Inland Empire, 5.9% in Los Angeles and 4% in Orange County, our industrial property outlook predicts that rental rates will continue to grow as the new construction pipeline has slowed significantly.

Year-over-Year Rent Growth vs. Vacancy Rate

Among the leading Western markets in the U.S., Los Angeles had the lowest under-construction pipeline on a percentage-of-stock basis, with 0.3% of its stock underway, encompassing 2.3 million square feet. Following that, Orange County had 695,108 square feet under construction, making up 0.4% of its total stock as of April. Meanwhile, the Inland Empire saw a significant decrease in its development pipeline, dropping from 32.6 million square feet in April of last year to 8.1 million square feet in April 2024, representing 1.2% of its existing inventory.

Looking at transactions, the West led the nation through the first four months of the year, with investors trading a total of $5.97 billion across the region's top markets, the latest industrial property market report shows. The Bay Area claimed the top position, recording $2.15 billion in industrial transactions at an average price of $620 per square foot.

Los Angeles was next, with a total sales volume of $1.35 billion, with properties trading at an average price of $319 per square foot. Coming in well below the $1 billion mark, Phoenix logged the third-largest transaction volume in the West, with investors closing $617 million in sales at an average of $159 per square foot.

Midwestern Markets: Chicago Leads Region in Sales, Totaling $834 Million

Logistics hubs in the Midwest remained the tightest industrial markets in the U.S. despite heavy development in recent years and significantly lower rent growth compared to the Port markets. With only 2.7% of its industrial space available for lease, Columbus recorded a 6.7% rent growth in April compared to year-ago figures, below the national increase of 7.4% over the same period.

Meanwhile, the next tightest industrial market in the U.S., with a vacancy rate of 3%, Kansas City saw its lease rates increase by just 3.6% year-over-year in April. Overall, Detroit saw the slowest rent growth across the nation’s 30 largest industrial markets, rising 3% compared to year-ago figures. Despite this slow growth, Detroit had the second-highest in-place rents at $6.90 per square foot in the region, just slightly below the Twin Cities' lease rate of $6.91 per square foot.

Midwest Regional Highlights

The widest lease spreads in the Midwest were recorded in Chicago and Indianapolis, where new leases inked over the past 12 months cost $1.85 more per square foot and $1.53 more per square foot, respectively.

As of April, Kansas City led the Midwest in development both by percentage of stock and by total square footage, with 4.6% of its inventory, or 13.3 million square feet, under construction. Columbus followed in terms of percentage of stock, with 6.7 million square feet under construction, representing 2.1% of its inventory. In terms of sheer square footage, Chicago had the next-largest pipeline, with 11.1 million square feet under construction, accounting for 1% of its existing stock.

Chicago logged the largest sales volume in the region and the fourth largest nationally, with industrial deals amounting to $834 million year-to-date through April. Columbus recorded the next-largest sales volume in the Midwest, closing $318 million in sales over the same period.

In terms of sale prices, however, the Twin Cities came first, with properties trading at an average of $106 per square foot, followed by Kansas City’s $91 per square foot and Chicago’s $89 per square foot.

Southern Markets: Miami Tenants Pay Largest Premium, with New Leases $5.97 Above In-Place Rents

Among leading Southern markets, Miami recorded the most significant uptick in rents, rising 12% year-over-year in April — the second-highest rent growth nationally, just slightly exceeded by the Inland Empire’s 12.5% rate. Baltimore followed with a 7.9% increase, while Atlanta and Nashville both experienced rent growth of 7.5%.

Thanks to its robust rent growth, Miami also posted the highest lease rate in the South, with in-place rents at $11.39 per square foot in April. The next-priciest markets were Baltimore and Tampa, with lease rates at $10.96 and $7.68 per square foot, respectively. In contrast, Memphis remained the most affordable market, with lease rates at just $3.91 per square foot.

South Regional Highlights

Miami led the nation in lease premiums, with new leases signed over the past 12 months costing $17.36 per square foot, $5.97 above in-place rents. Tenants in Nashville and Tampa also inked at higher premiums, with new leases costing $3.38 and $3.33 more than in-place rents, respectively.

As of April, the Dallas-Fort Worth Metroplex had the largest development pipeline in terms of square footage, with 23.4 million square feet under construction, equal to 2.4% of existing inventory. However, this represents a nearly 60% decrease from the same period last year, when 56.4 million square feet were under construction, representing 6.4% of its stock.

The Metroplex has also become one of the most active markets for industrial deals, with $1.01 billion in sales year-to-date through April — the third-largest sales volume nationwide. Sales activity in the metro was mostly driven by the cold storage sector. For instance, Vertical Cold Storage has acquired a 400,000-square-foot cold storage facility in Burleson, a facility valued at $50 million.

Northeastern Markets: New Jersey Sees Most Investment Activity in the Northeast

As industrial vacancy rates continued to ease across the U.S., the leading markets in the Northeast also saw an uptick in availability. For example, New Jersey’s vacancy rate stood at 6% in April, well above the 2.9% logged during the same period last year. Similarly, Boston's vacancy rate climbed from 6.9% last year to 9% in April 2024. Meanwhile, Bridgeport's vacancy rate increased to 4.5% from 4%, and Philadelphia's rate rose to 5% from 4.2% last year.

Despite the uptick in vacancies, both New Jersey (8.9%) and Boston (7.7%) saw rent growth above the national increase of 7.4% year-over-year in April. The two markets also remained the priciest in the Northeast, with in-place rents coming in at an average of $10.53 per square foot in New Jersey and $10.48 per square foot in Boston.

Northeast Regional Highlights

At the same time, in-place rents increased by 6.4% year-over-year in Philadelphia, reaching $7.98 per square foot, and by 6.1% in Bridgeport, to $9.06 per square foot. Bridgeport had the highest lease spreads in the region, with new leases averaging $12.81 per square foot, $3.75 more than in-place rents.

Across leading Northeastern markets, New Jersey logged the largest sales volume year-to-date through April, totaling $612 million. The market also claimed the region’s highest sale price, with properties trading at an average of $293 per square foot. In contrast, Bridgeport had the smallest sales volume at just $37 million.

Philadelphia continued to have the largest development pipeline in the Northeast, with 8.9 million square feet of space under construction, accounting for 2% of its existing stock as of April. This is significantly below last year's pipeline when the market had 17.7 million square feet underway, equal to 4.2% of its inventory.

Economic Indicators: Warehouse Employment Creeps Up

The warehousing and storage sector added 7,600 jobs in April, according to the Bureau of Labor Statistics. Prior to April, warehouse employment had been relatively flat in 2024, with only 1,100 jobs added in the first three months combined. Despite these modest gains, they were a positive sign after the sector's decline following its all-time high in May 2022. Over the next 18 of 19 months, the sector lost 173,700 workers and remains down 3.2% year-over-year.

Employment in this sector, which had rapidly expanded during the first two years of the pandemic, began to decline as people returned to physical stores and the e-commerce boom leveled off. This trend in warehouse employment reflects the demand for logistics space, which saw explosive growth during the pandemic, followed by a pullback and recalibration. The recent uptick in employment is good news for the industrial sector.

Download the complete May 2024 report for a full picture of how U.S. industrial markets evolved in April, 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 office 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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