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Industrial: Growth, Gaps, and a Changing Landscape

Deanna Kawasaki
October 1st, 2024
2 Min Read

Key Takeaways:

  • A resilient economy and strong consumer spending are driving the industrial market forward. Despite a recent slowdown, the U.S. industrial sector showed positive performance in Q2 2024. 

  • Net demand surged, with overall net absorption more than doubling to 46.3 million square feet (msf). Vacancy rates rose slightly as 121.1 msf of new construction was completed, while asking rents increased to $9.97 per square foot (psf), marking a 3.7% year-over-year rise—the lowest since 2020.

  • The construction pipeline is shrinking, with 343 msf currently underway, down 14% from the previous quarter and less than half the peak of 718 msf in Q3 2022. This trend is expected to continue into 2025, which will help tighten vacancy rates as new supply becomes absorbed.

Economic Drivers:

U.S. manufacturing activity remains subdued, with the ISM Manufacturing Index in contraction for the fifth consecutive month and the 21st time in the last 22 months. Manufacturing employment has stagnated during this period.

Since April 2022, the temporary jobs sector has lost 444,500 positions—12.6% from its peak—primarily affecting manufacturing and transportation/warehousing roles. Additionally, 80,000 jobs have been lost in transportation/warehousing since August 2022, reflecting a softening forecast of absorption in 2024 and early 2025.

However, improving global growth is expected to boost manufacturing activity, exports, and trade, benefiting industrial CRE as 2025 approaches. E-commerce continues to grow, and a strong job market with rising real income should support steady consumption, particularly of nondurable goods.

Outlook:

The industrial market is expected to tighten in the second half of next year, driven by e-commerce growth, onshoring, nearshoring, and strong consumer demand, though at a slower pace compared to the peaks of 2021 and 2022. While e-commerce remains a growing share of retail sales, the rapid demand surge during the pandemic—when companies expanded swiftly—will affect the outlook for 2024 and early 2025.

Absorption is forecasted to drop to just over 100 million square feet (msf) in 2024, then nearly double in 2025, with a return to more typical demand levels expected by 2026. Markets that saw the largest rent increases from 2020 to 2022 are currently experiencing pullbacks in demand due to consolidation efforts. Asking rent growth is projected to slow, ending 2024 at 3.0% and decreasing to 2.2% in 2025, with a rebound anticipated to mid-single digits in 2026 as vacancy rates tighten. New supply is expected to reach 380 million square feet by year-end but will drop to 160 million square feet in 2025 before rising again.

New supply will significantly influence vacancy rates in 2024, with an additional 381 msf expected to come online this year. The supply pipeline is decreasing, with only 160 msf projected for 2025. Lower interest rates and improving fundamentals are likely to spark a new construction cycle.

The supply-demand imbalance may appear more pronounced than it is—vacancy rates are expected to peak at 6.7% in early 2025 before gradually returning to around 5% by the end of Cushman & Wakefield’s five-year forecast. This aligns with the lowest vacancy rates seen in previous cycles, indicating that this cycle is fundamentally different.


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