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Industrial Vacancy to Peak in 2025, Construction Down 50%

The US industrial property sector faces rising vacancies, with rates expected to peak in mid-2025.
CRE Daily Newsletter

Industrial Vacancy to Peak in 2025, Construction Down 50%

The US industrial property sector faces rising vacancies, with rates expected to peak in mid-2025.

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Good morning. Industrial vacancies are rising—but at their slowest pace in years. With a peak projected by mid-2025, could the market finally be turning a corner?

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👉 Your perspective matters! Take 4 minutes to share your thoughts on the CRE market's pulse in the Q4 2024 Fear and Greed CRE Survey.

Market Snapshot

S&P 500
GSPC
5,949.17
Pct Chg:
-0.60%
FTSE NAREIT
FNER
803.39
Pct Chg:
-0.97%
10Y Treasury
TNX
4.434%
Pct Chg:
+0.014
SOFR
30-DAY AVERAGE
4.844
Pct Chg:
0.0%

*Data as of 11/14/2024 market close.

VACANCY VACUUM

Industrial Market Hits Inflection Point

The U.S. industrial real estate market is edging toward stabilization, with vacancy rates predicted to peak in mid-2025 as construction significantly slows.

By the numbers: The national industrial vacancy rate hit 6.6% in Q3 2024, increasing at its slowest pace since 2022, according to Colliers. Projections indicate a peak of 6.8% in mid-2025, followed by a decline, hinting at a potential market stabilization.

U.S. Industrial Construction Pipeline Q3 2024

Source: Colliers U.S. Industrial Market Outlook Report | Q3 2024

Construction pipeline plummets Industrial construction has nosedived, with projects under construction dropping from a record 711M SF in 2022 to 331M SF—a 53% decrease. Deliveries for Q3 2024 also dropped sharply, with only 76M SF completed, 54% less than the same period in 2023. By mid-2025, construction activity is expected to fall below pre-pandemic averages.

What about rent growth? Although industrial rents grew 9% year-over-year to $11.08 per SF, rents plateaued in the last quarter and even fell in 15 markets. Rent growth is expected to moderate, aligning closer to historical averages of 2%-7% into 2025 and 2026.

Zoom in: Austin leads the country with 17.2M SF under construction, amounting to 18.7% of its existing inventory. The South region dominates national construction, with 140.6M SF underway, but also faces the highest vacancy rate at 7.8%.

Industrial Fastest Growing (Under Construction as % of Inventory)

Source: Colliers U.S. Industrial Market Outlook Report | Q3 2024

➥ THE TAKEAWAY

Are we there yet? The industrial market is navigating a period of recalibration. Falling construction and stabilizing rents signal a potential bottoming out, but broader economic uncertainties could dictate the pace of recovery.

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✍️ Editor’s Picks

  • Real estate roulette: Institutional interest in CRE weakens after a strong decade, with negative returns of -1.4% in 2023 prompting reduced institutional allocations for 2025.

  • Optimistic outlook: The Real Estate Roundtable’s Q4 Sentiment Index surged to 73, its highest level since 2021, with CRE execs optimistic about asset stabilization, capital access, and sector-specific growth.

  • Inflation fears: Larry Summers warns that inflation risks remain high despite rate cuts, pointing to persistent core inflation and economic growth as signals the Fed may be underestimating things.

  • Loan losses: CMBS loan losses decreased in October, with $75.7M across 10 loans resolved, resulting in a total loss of $47.3M.

  • Managing debt: Household debt grew 0.8% in Q3 to $17.94T, but rising incomes and declining debt-to-income ratios are helping Americans manage their financial obligations despite increased borrowing.

  • It’s about time: NYC is seeking proposals to transform the long-vacant, 80-acre Flushing Airport site in Queens' College Point into a mixed-use development, potentially including new housing options.

  • Market divide: JLL CEO Christian Ulbrich reports that high-end commercial buildings are hitting record occupancy levels, while lower-tier properties face rising vacancies amid challenging interest rate conditions.

🏘️ MULTIFAMILY

  • Rent rollercoaster: Redfin reports national rent growth stagnation across the multifamily market, with Midwestern cities prospering as Sun Belt cities see declines.

  • Trendsetter move: Blackstone (BX) added to its San Diego apartment holdings with a $200M Chula Vista deal, one of the region's biggest in the past year.

  • Elite Real Estate: Carlyle Group (CG) partnered with Stonehenge NYC to buy The Henley for $128M, or $853K per unit, solidifying its focus on the Upper East Side.

  • Housing hikes ahead: Apartment rents in Southern California are forecasted to go up by $110 to $148 monthly, due in part to a construction slowdown.

  • Give me a break, please: Oxbow Development Group is pursuing $1.4M in tax abatements for a $129M apartment project in San Antonio's Pearl District.

  • Taking the hit: Acacia Capital purchased a 304-unit property in Redwood City, CA, for $184M, a nearly $29M loss for seller Nuveen.

🏭 Industrial

  • Data downtrend: Data center construction planning slowed down in October with a 6.7% decline, signaling a potential plateau amid what seems to be ever-rising demand.

  • Makeover success: A JV between Woodmont and Sagard secured a 65-month 104.5 KSF industrial lease with Federation Distribution Services in Monmouth Junction, NJ.

  • Railroad revolution: Pending county approval, BNSF Railway's 839-acre Logistics Park in Wittmann, AZ (near Phoenix), may feature a rail terminal and a logistics center.

🏬 RETAIL

  • Construction conundrum: Industrial vacancy rates stand at 6.6% while retail vacancies are at 4.5%, with minimal new retail construction expected in 2024.

  • Rent relief rally: Michael Kors (CPRI) doubled its brick-and-mortar space at 667 Madison Avenue, securing a deal with 49% lower rent, or $438 PSF.

  • Mediterranean magic: Cava Group (CAVA) is planning a South Florida and Midwest expansion, with Q3 revenue up 39% to $241.5M and 18.1% same-store sales growth.

🏢 OFFICE

  • Suburban coworking boom: Nashville firm E|Spaces leased 32 KSF in Atlanta's Cumberland/Galleria area, part of a growing coworking trend in the suburbs.

  • Midtown magnate: The Elo Organization is set to acquire a fully occupied, 1920s Class B office building at 21 West 46th Street in Midtown West, betting on the location’s enduring appeal.

  • What a deal: UBS Group AG (UBS) signed a 10-year lease for a 33.2 KSF office in Coral Gables, FL, at around just $100 PSF. UBS will be the 84 KSF development’s first tenant.

🏨 HOSPITALITY

  • Getting it done: Rev Development secured a $26.3M debt package for a 111-room Holiday Inn Express in Silverthorne, CO, opening in 2025.

📈 CHART OF THE DAY

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