After several years of a red hot warehouse market in many metro areas since shortly after the start of the COVID pandemic in Q1 2020, demand is slowing, as the market as always appears to be reverting to the mean.
Supply Chain Digest Says... |
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That is certainly one of the key takeaways from a recently released report with lots of dataon Q4 in the US market for industrial space, largely warehouses, from real estate firm Cushman & Wakefield.
That change has kept lease rates up just a bit in Q4 versus Q3, but rising sharply versus the end of 2022.
In Q4, the report says, overall net absorption – newly leased space net of abandonments – came in at 41.1 million square feet (msf). That was down marginally from Q3 and pushed the annual total to 224.3 msf, which is on par with the 10-year pre-pandemic (2010-2019) average of 224.8 million.
Cushman & Wakefield forecasts absorption will moderate further in 2024, but remain positive.
The research also found another increase in record low vacancy rates continue to move upword, rising 70 basis points (bps) to 5.2%.
As shown in the chart from the report below, that marked the first time the rate surpassed the 5% mark since the third quarter of 2020. Average vacancy rates fell to a low of just 2.8% on average in Q2 2022.
Historically speaking, however, occupancy remains tight, as the vacancy rate sit 180 bps (1.8%) lower than the 10-year pre-pandemic historical average of 7%.
The report found that the Midwest region is now the tightest area at 4.6% in Q4, while the South posted the highest vacancy rate (6.0%) due to the abundance of new supply being delivered to the market. Of the 83 markets tracked by Cushman & Wakefield, 48 posted rates below 5%, including nine that remain below 3%.
And with all that, despite the rise in vacancy rates overall, asking rents for warehouse space inched higher, to $9.79 per square foot (psf). The 0.5% quarterly increase was well below the growth rates achieved since the start of 2021 (3.8% per quarter). But on an annual basis, rental rate growth reached 10% at year-end 2023 versus Q4 2022.
Source: Wall Street Journal
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In its outlook for 2024, Cushman & Wakefield offers three predictions:
Look for vacancy to inch up further, as the construction pipeline continues to deliver new product throughout the country, while demand moderates further. The national vacancy rate should peak at just over 6% in 2024 before re-tightening.
Net absorption is expected to remain tempered in 2024, as cooler consumer demand for goods, persisting elevated interest rates and sticky inflation hamper growth. Still, almost 365 msf of space is expected to be absorbed in the next two years.
More sustainable rent growth will occur in 2024, as vacancy ticks higher and markets rebalance. It’s important to note that although vacancy has and will continue to go up, many markets will remain well below long-term historical averages. Vacancy rates in the 5%-6% range typically generate steady rent growth in the mid-single digits.
As this wave of industrial product delivers over the next 12 months, the construction pipeline will shrink further, leading some markets to become supply constrained in 2025 as absorption starts to regain momentum.
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