The demand for warehouse space has been red hot since the pandemic in 2020, sending vacancy rates falling to record low levels in many markets and pushing lease rates much higher.
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But according a new report from CBRE summarizing developments in Q3 in the market for industrial real estate - most of which is warehousing – the environment is changing a bit.
Case in point: Warehouse construction starts in Q3 fell by 37% quarter-over-quarter and 64% year-over-year to 40 million square feet, lowering the under-construction total for the fourth consecutive quarter to 479 million square feet, CBRE research finds.
That 40 million square feet was less than half of the Q3 2022 total. As a result, new deliveries are expected to drop considerably by the second half of 2024.
The developers were simply responding to weakening demand for space.
CBRE finds that net absorption (new leasing versus abandon space) of warehouse properties declined by 35.6% quarter over-quarter to 55.8 million square feet, while the year-to-date total of 200.7 million square feet was down by 47.3% from the same period last year.
The large difference between completions and net absorption increased the overall US vacancy rate to 4.2%, the highest level since Q1 2021 (though vacancy rates and trends vary significantly by market).
CBRE says that “Although this was the fourth consecutive quarter of rising vacancy, the rate remained below the 10-year average of 4.7%.”
The research also found that year-to-date leasing activity through September was down by 12.4% from last year and by 21.4% from 2021.
In addition, leases of small warehouses of less than 25,000 square feet were the only size range with increased volume year-over year.
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Only 32 leases for spaces of 1 million square feet or more have been signed year-to-date, down from the 50 signed at the same time last year.
While total square footage in lease renewals was up by 11% year-over-year, new leasing activity fell by 21% in the third quarter.
But despite all that, lease rates continued to rise sharply. CBRE found that average net asking rents rose 2.0% quarter-over-quarter and 9.1% year-over-year to a record $10.16 per square feet on average across the US. (See graphic from the report below.)
US Warehouse Lease Rate Changes
Source: CBRE
While the 9.1% average year-over-year lease rate is the lowest in six quarters, it is still well above historical averages.
Which markets have the most warehouse space under construction? The report has that too, as seen in the graphic below from CBRE, with Dallas-Ft. Worth leading the way at 46.9 million square feet:
Source: CBRE
The full report from CBRE is available here: US Industrial Review Q3 2023
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