It’s still one of the darlings of today’s commercial real estate market. But as 2023 drew to a close, the U.S. industrial market sputtered slightly.
Though “slightly” is the key word here.
In its fourth quarter U.S. industrial report, Cushman & Wakefield reported that the combination of slowing demand and a healthy rate of speculative construction completions caused the U.S. industrial vacancy rate to increase by 60 basis points to 5.2% in the last quarter of 2023.
What’s interesting is that this is the first time the industrial vacancy rate has risen higher than the 5% mark since the third quarter of 2020. Does this mean it’s time to panic or that an industrial market slowdown is on the way? Not necessarily. As Cushman & Wakefield reports, the industrial vacancy rate at the end of last year still remained 120 basis points below the sector’s long-term 15-year average of 6.4%.
“While the new development pipeline has exceeded demand, we are clearly seeing signs that construction is slowing in response to market conditions and tempered absorption totals,” said Jason Price, head of logistics and industrial research at Cushman & Wakefield, in a written statement. “Leasing velocity remains steady but occupiers continue to shed excess space in some markets, leading to slower growth.” .
On the market level, 58 of the 83 markets tracked by Cushman & Wakefield reported positive absorption in the fourth quarter, 19 of which surpassed 1 million square feet of occupancy gains. Houston led the way with 6.4 million square feet of industrial absorption in the quarter.
New industrial deliveries totaled 156.3 million square feet in the fourth quarter, down 9.8% from the record high of 173.2 million square feet achieved in the third quarter of last year. Despite this dip, the fourth-quarter deliveries represented the second-highest completion total on record for the industrial sector, fueled mainly by vacant, speculative deliveries across all four regions.
This also marked just the fourth time in history that the United States delivered more than 150 million square feet of new industrial space in a quarter. For the year, 609.6 million square feet of new industrial product delivered nationwide, surpassing the previous record for deliveries in 2022 by 17.6%.
Overall net absorption remained muted in the fourth quarter with 41.1 million square feet of space absorbed, down from the 52.5 million square feet recorded in the third quarter of 2023. Year-to-date net absorption finished at 224.3 million square feet, in line with the pre-pandemic 10-year average of 224.8 million square feet. Earlier this year, Cushman & Wakefield forecasts predicted annual U.S. net absorption at 218.9 million square feet, 2.5% lower than the actual number.
New leasing activity remained steady at 133.8 million square feet, down 2% from the leasing activity recorded in the previous quarter. While quarterly demand fell in the south region in Q4, the other three regions recorded increases in new leasing activity throughout the fourth quarter. Meanwhile, the U.S. industrial market yielded 588 million square feet of year-to-date new leasing activity in 2023, the fourth strongest year on record. In a testament to the long-term strength of the U.S. industrial market, this marked the eighth straight year in which the nation posted more than 550 million square feet of new transactional volume in this sector.
“As expected, amid the backdrop of rising vacancies coupled with tempered demand, asking rental growth continued to slow in the fourth quarter,” Price said. “On a quarterly basis, the U.S. overall industrial rental rate ticked higher by 0.5%, down from 1.1% the previous quarter. On an annual basis, rent growth moderated to 10%, the fifth straight quarter in which the annual rent growth rate declined. We expect rent growth throughout most of the country to continue to slow in 2024 as we previously forecast.”
The northeast region continued to see rents rise at a healthy rate year-over-year at 16.1% while the other three regions posted annual growth rates ranging from 5.5% to 6.6%.
