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State of the U.S. Industrial Market

State of the U.S. Industrial Market

By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business Journals

The nation’s industrial market continued to slow in the third quarter, building on a two-year cooling-off period after its pandemic heyday, but the market could soon hit bottom.

Preliminary data from Savills found the U.S. industrial vacancy rate hit 7.4% in Q3, a 350-basis-point increase from two years ago. It’s also the highest vacancy rate within the national industrial market in a decade.

Mark Russo, vice president of industrial research at Savills, said the national industrial market has undergone the steepest uptick in vacancy in the shortest period of time ever. That’s largely thanks to how hot the market had become — and how very quickly — during the Covid-19 pandemic, followed by a significant cooling-off period as consumer and industrial tenants’ needs changed.

Sublease availability also grew substantially within industrial in Q3, reaching a record 198.7 million square feet. That’s up 45% from the same time a year ago and continues to rise, albeit at a slower pace than what’s been recorded in recent quarters. Sublease space grew 8.8% in Q3 compared to an average quarterly growth rate of 20.1% last year.

“The base of the change that we’ve experienced … has been a big shock to the system and has had a lot of implications in terms of rents and tenant-landlord dynamics,” Russo said. “To characterize the current situation, we’re finding the bottom of this mini-cycle. I think we are approaching that plateauing of vacancy and sublease availability, but time will tell.”

It’s likely more industrial groups will move forward on real estate decisions following the November election, Russo said, once they’ve begun to figure out what the incoming White House administration’s policy goals may be.

In response to the slowing market, new construction has also plummeted, with starts in Q3 hitting their lowest level since 2016.

As of the third quarter, 309.3 million square feet of industrial space nationally was under construction, the lowest level since the end of 2018, according to Cushman & Wakefield PLC (NYSE: CWK).

And while leasing activity has dampened across the board, the 139.6 million square feet of leases signed in Q3, according to Cushman, was 8% higher than the 10-year pre-pandemic average and nearly equal to last year’s total of 140.9 million square feet.



Market differences

Although the industrial market has been slowing for the past several quarters nationally, some markets are experiencing bigger declines than others.

Russo said hot industrial markets like Phoenix and Dallas, in addition to a few smaller markets like Austin, Texas; Savannah, Georgia; and Charleston, South Carolina, have all slowed substantially and are currently facing double-digit vacancy rates.

“[They] were markets that were very hot, and those high-growth markets tend to fall the most,” Russo said. “It’s going to take an extended period of time to work through that excess supply.”

Southern California — arguably the most prominent industrial market in the U.S. because of its proximity to the nation’s largest port complex — experienced the recent downturn sooner than other regions. Rents are down 15% to 20% in that market — still up substantially compared to pre-pandemic times, but the market is trying to reprice after such a short period of growth, Russo said.

Despite higher vacancy and rent declines, the Inland Empire in southern California did continue to see big-tenant activity in Q3, with Western Post occupying 927,700 square feet in Rialto, The Campbell’s Co. moving into 690,900 square feet in Fontana and eFulfillment Services taking occupancy of 651,800 square feet in Bloomington, according to Savills.

Among locations tracked by Cushman & Wakefield, eight markets recorded double-digit vacancy in Q3: Phoenix (12.7%); San Antonio (12.3%); Charleston (11.9%); Birmingham, Alabama (11.7%); Austin (11.3%); Indianapolis (11.1%); Greenville, South Carolina (10.9%); and El Paso, Texas (10.1%).

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