2024 Mid-Year Outlook Industrial Real Estate Market Report
iOptimize Realty®
Tenant Representation, Renegotiation, Right-sizing, Relocation, Economic Development, & CRE Optimization
In this article, we explore:
Industrial commercial real estate has been relatively stable compared to the economic uncertainty present in other markets. The property type remains in high demand, seemingly immune to the recession-like circumstances taking place in commercial real estate sectors.
Take, for example, the office sector, which is on the brink of collapse. Research proves that record low office demand and high office vacancies have placed 1 in 3 office landlords on a default watchlist.
And in the residential real estate sector, the pressure of inflation and high interest rates has completely stalled any new housing. Even multifamily is beginning to show cracks in its foundation.
But somehow, three years in the wake of the pandemic, new development of industrial and warehouse properties remains strong. Interest from investors, tenants, and consumers has kept the fire burning and the capital coming in. And while there are fluctuations in leasing activity and absorption, it is the property type expected to dominate the commercial real estate pipeline in the next few years.
So, let's take a look at the key takeaways and insights from the 2024 Industrial Mid-Year Outlook, highlighting important market trends and factors to watch as we move into the second half of the year.
Leasing Activity
Leasing activity has seen a robust increase, with a significant 30.2% rise quarter over quarter, culminating in a total of 137.6 million square feet of leased deals. This surge indicates a strong demand for industrial spaces, despite broader market challenges.
Lease Pricing
New leases signed in the past year averaged $10.25 per square foot. Notably, the premium paid for new leases was considerably higher in the most in-demand markets, reflecting a trend where high-demand areas continue to command higher prices.
According to Commercial Edge, these price gains are expected to persist because there is a slowdown of new supply.- high inflation and interest rates
69.2 million square feet are under construction this year, coupled with normalizing demand driven by nearshoring and reshoring of manufacturing, which is contributing to this trend.
Rent Growth
Rent growth in the industrial real estate market is leading to higher sales prices, reflecting strong demand and limited supply. According to a recent report, three of the top 30 industrial markets—Nashville, the Inland Empire, and Philadelphia—saw prices more than double between 2019 and 2023. Other strong markets for industrial pricing include New Jersey, Charlotte, Dallas/Fort Worth, and the Bay Area.
In May, the national average rate for all in-place leases was $8 per square foot, marking a 7.5% increase from last year.
The Inland Empire led the pack with the highest industrial rent growth, seeing in-place rents rise by 12.6% over the past 12 months. Following closely were Los Angeles with an 11.6% increase, Miami with 11.4%, and New Jersey with 9.6%. Notably, Phoenix was the fastest-growing market not adjacent to a shipping port, with an 8.7% rent growth year over year.
These trends are expected to remain strong in the second half of the year. The rising rents are contributing to higher sales prices, with the average industrial sale price across the country reaching $142 per square foot in May. This figure represents a 15.4% increase from last year and a significant 71.2% rise since 2019. For comparison, assets in the office market are trading at about $165 per square foot.These figures have never been so close. Our prediction is that these numbers will cross.
Warehouse Sale Price: $142 psf
Office Sale Price: $165 psf
Sellers in the industrial market are benefiting from these trends, as the combination of rising rents and higher sales prices makes industrial real estate an attractive investment.
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Industrial Market Construction
Nationwide, a total of 381 million square feet of industrial space is currently under construction. While most markets experienced slower construction activity over the past year, Atlanta bucked this trend with a slight increase in its pipeline size. This can be attributed to Atlanta's strategic central location relative to the Southeast's growing population and its connectivity via major highways, which keeps it a desirable market.
Despite the overall demand, industrial construction completions have outpaced tenant demand for the seventh consecutive quarter. This imbalance has led to a 50-basis point increase in the U.S. average vacancy rate, which reached 6.1% during the first quarter of 2024—the highest rate since early 2015. This rise in vacancy rates suggests that the market is struggling to absorb the new supply as quickly as it is being built.
Looking ahead, the market's net absorption will be a critical metric to watch. Over the next five years, absorption rates will need to align more closely with construction completions to stabilize vacancy rates and support sustained growth in lease pricing.
Economic Growth through E-commerce
The industrial economy is being bolstered by a resurgence in the e-commerce sector. Initially, e-commerce drove significant demand for industrial space during the early days of the pandemic, which was followed by a pullback due to overexpansion in 2022. Now, the sector is growing once again, revitalizing the industrial market.
The warehouse and storage sector of the labor market, which had been shrinking for six quarters, is now adding workers. Amazon, which had been subleasing space for the past two years, is reportedly signing new leases again, according to Commercial Edge. This renewed activity highlights the continued importance of e-commerce in driving demand for industrial space and shaping the future of the industrial economy.
Onshoring
The growing trend of onshoring and nearshoring in the industrial sector is rooted in the geopolitical uncertainty of the past decade.
Companies are increasingly bringing operations back to their home country to stabilize supply chains and mitigate risks associated with global disruptions. This shift is not just a response to recent events but a strategic move to enhance supply chain resilience and gain greater control over production processes.
In America, onshoring has gained prominence as businesses adapt to rising offshore production costs, supply chain disruptions, and the need for greater control. This shift involves bringing operations back to national soil and nearby countries, driven by geopolitical factors and the lessons learned from the pandemic.
Onshoring enhances supply chain resilience, reduces shipping costs, speeds up turnaround times, improves quality control, and taps into local talent. It also addresses uncertainties in trade and political unrest, making it attractive to investors and manufacturers. The growing trend of onshoring is driving up demand for industrial space, with over 1,800 companies’ reshoring their production last year, according to the Reshoring Initiative.
As inflation eases and the Federal Reserve adjusts higher interest rates, the economic landscape remains challenging. However, the push for onshoring and nearshoring continues to attract significant investment, as businesses seek to reduce dependency on overseas production. This trend is reshaping the industrial real estate market, driving demand for warehouses, factories, and distribution centers across the country.
The impact of onshoring and nearshoring extends beyond individual companies, influencing the broader economic environment. By relocating manufacturing and other operations closer to home, businesses are better positioned to navigate geopolitical uncertainties and ensure a more stable supply chain. This strategy not only supports domestic economic growth but also contributes to consistent demand for U.S. warehouse space.
High Tech Data Centers
E-commerce growth and complex supply chains are driving the automation, or "robotification," of modern warehouses. NVIDIA leads this transformation with its Blackwell platform, which integrates advanced AI to optimize tasks like inventory management and order fulfillment. This shift enhances efficiency, reduces errors, and lowers costs. According to CEO Jensen Huang, factories and their products will become increasingly robotic, fundamentally changing warehouse operations.
Rise of AI Factories
NVIDIA's Blackwell platform also introduces AI factories, compact and high-density data centers designed for intensive AI workloads. These facilities are ideal for urban areas, utilizing underutilized office and retail spaces. Tech giants like Amazon, Google, Microsoft, and Tesla are adopting AI factories to meet AI demands. As AI advances, these specialized data centers will proliferate, transforming industrial real estate and computational resource management.
Takeaways for Industrial Tenants
The 2024 mid-year outlook for the industrial real estate market reveals a resilient sector with strong demand and growth potential, offering strategic opportunities for tenants. Despite economic uncertainties impacting other sectors, industrial real estate continues to thrive. Leasing activity has surged, indicating robust demand, while rent growth contributes to higher sales prices.
For tenants, this dynamic environment presents several advantages. The resurgence of e-commerce and the trend of onshoring are driving up the demand for industrial space, creating opportunities for tenants to secure favorable lease agreements. With new industrial developments and warehouses continually being added to the market, tenants can capitalize on increased competition among landlords to negotiate better terms and lower occupancy costs.
Additionally, advancements in technology, such as AI and automation, are making warehouse operations more efficient and cost-effective. Tenants can leverage these innovations to optimize their logistics operations, reduce errors, and improve overall efficiency.
With the market tighter than ever, tenants should take advantage of tenant representatives. These professionals can provide invaluable insights into market trends, assist in identifying the best properties, and negotiate favorable lease terms. By utilizing tenant representatives, tenants can navigate the competitive landscape more effectively, ensuring they secure the best possible deals.