Following a streak of heightened demand in recent years, the industrial real estate market is cooling to normal levels, exemplified by the recent increase in vacancy rate, based on the latest report from Cushman & Wakefield.
During Q2 2023, the overall industrial vacancy rate rose by 60 basis points, surpassing the 4% mark for the first time since mid-2021. This increase can be attributed to the completion of spec developments and the resizing of occupiers due to lower consumer demand and higher inventory levels.
Cushman & Wakefield Senior Research Director for U.S. Industrial & Logistics Jason Price noted: “While we have seen the amount of industrial space under construction drop, we are now seeing the impact of the robust pipeline of product coming to market and easing pressure on markets that were at historically low vacancy rates through the pandemic. Coupling this with tempered consumer demand, we see generally softening market conditions.”
In terms of new space, Q2 witnessed the delivery of over 139.5 million square feet, marking the third-highest quarterly total on record and surpassing the Q1 total of 134 million square feet. Additionally, the increase in vacant sublease space contributed to the more modest absorption figures witnessed in the first half of 2023. The quarter-over-quarter rise in vacant sublet space amounted to 38%, resulting in a current total of 66.8 square feet, according to the report.
Of course, the market demonstrated resilience in terms of leasing activity. In Q2 alone, approximately 141 million square feet of leasing deals were signed, representing only a 9% decrease compared to Q1. The year-to-date figure of nearly 300 million square feet is in line with the midyear average achieved from 2018 to 2020, indicating a positive trajectory towards reaching nearly 600 million square feet by the end of 2023. Renewal activity experienced significant growth, with almost 73 million square feet of tenants choosing to stay in their current spaces nationwide.
And while it’s true that market conditions have softened, asking rents have continued to rise, increasing by 4.6% since Q1 and over 16% annually, though a portion of the increase can be attributed to the introduction of higher-priced, premium vacant new construction in the market.
Finally, Cushman & Wakefield also revealed a decline in the construction pipeline for the third consecutive quarter. Pre-leasing activity remains low, with only 19.2% of the square footage being built already leased by tenants.