The U.S. industrial vacancy rate increased by 40 basis points in the second quarter, reaching 6.1%, the highest level in nine years, according to the latest research from Cushman & Wakefield.
Despite this rise in vacancy, though, industrial absorption doubled in the second quarter, with 46.3 million square feet of space taken off the market, a sign that even with a higher vacancy rate, the U.S. industrial sector still boasts strong market fundamentals.
Jason Price, Americas Head of Logistics & Industrial Research at Cushman & Wakefield, said that while no one likes to see higher vacancy rates, the vacancy rate in the industrial sector remains well below the 10-year pre-pandemic average of 7%.
“Despite the rise in vacancy, industrial markets are showing increasing levels of demand after a sluggish first quarter,” Price said. “New supply is leveling off as developers wait for the market to catch up. We expect that vacancy will peak early next year at 6.7% as the markets stabilize.”
Asking rent growth continued to cool, with nationwide rents rising 3.7% year-over-year, driven by the Northeast (+5.3%) and South (+2.9%) regions.
Quarterly leasing activity was 137.2 million square feet, down 2.8% from the 141.1 million square feet reported in the first quarter. However, the second quarter total was 11.2% higher than the 10-year pre-pandemic quarterly average of 126.9 million square feet.
The U.S. registered 278.4 million square feet of new deal activity through midyear, putting the market on pace to surpass the 500-million-square-foot mark for the 10th straight year. These normalized levels of deal volume are partially due to moderating consumer demand, longer transaction times and, in some cases, decreasing average deal sizes.
Seven markets recorded more than 10 million square feet of leasing activity through midyear, led by the Inland Empire (22.1 million square feet), Dallas/Ft. Worth (19.2 million square feet) and Houston (16.7 million square feet).
New construction deliveries remained robust, with 121.1 million square feet of new product completed in the second quarter, on par with the previous quarter. This pushed the year-to-date total to 239.6 million square feet, the second-highest midyear total on record, 84% of which was speculative. The South region continues to account for the highest share of new deliveries (48.3%), with markets such as Atlanta, Dallas/Ft. Worth, Savannah, and Houston delivering large amounts of new industrial space.
Construction starts remained relatively muted in Q2, although up slightly compared to the first quarter. The under-construction pipeline fell to its lowest level (343.3 million square feet) since mid-2020 (334.8 million square feet). The pipeline has declined by 14.4% since Q1 and is down 46% from a year ago. The South (-118%) and Midwest (-99%) regions posted the sharpest pipeline declines during the same period.
Of the national under-construction pipeline total, speculative product makes up 67.7%, down from 71.4% in the first quarter. This share is likely to decrease further in the second half of 2024 as speculative warehouse facilities continue to deliver at a healthy rate and build-to-suit manufacturing facilities remain under development due to their longer construction timelines.
“Industrial markets continue to show strength and resilience, even as they adjust and level-set following the pandemic boom,” said Price. “As development slows to meet demand and absorption catches up to supply, we will see the markets find balance.”
