U.S. industrial real estate vacancies continue rising amid new construction and lagging demand—and the trend is likely to continue into 2024.
According to JLL’s Industrial Outlook, vacancy rates across U.S. industrial real estate reached 4.9 percent in the third quarter, an increase from 4.2 percent in the prior quarter and up more than a percentage point from the 3.8 percent rate that started the year.
Warehousing and distribution have the highest vacancy rates at 5.8 percent, ahead of manufacturing facilities at 2.3 percent and “special purpose” sites at 2.6 percent.
Mehtab Randhawa, senior director, Americas industrial research at JLL, said the current scenario is a result of the industry cramming three to five years of warehouse demand into a span of 24 months during the Covid-19 pandemic—leading to “all-time” vacancy lows. But supply has since far outstripped demand.
“It’s not a shock—not a surprise,” Randhawa told Sourcing Journal. “What we saw in 2021 and 2022—that demand had to cool off as that level was just not sustainable. You’re going to see that supply gap come in, but in a way, I think it’s a positive. A lot of the markets have been supply-constrained for way too long, and companies have had minimal options to choose from between buildings.”
With record year-to-date deliveries—meaning completed construction projects—at 424.9 million square feet, the national industrial inventory has grown by over 1 billion square feet from first quarter of 2022 to the present, with another 3.2 percent expected growth through the first half of 2024, JLL said.
According to Randhawa, vacancy rates are only going to go up in 2024, as “a lot of buildings are now nearing the end of their completion cycle, so there is new supply hitting the market.”
Average asking rent is still in high-growth mode, increasing 15.3 percent year-over-year to $9.74 per square foot. But the rate of growth is slowing, from 18.4 percent year-over-year growth in the second quarter and 20.6 percent annual growth in the first quarter.
“We’re no longer going to see that crazy 80 percent to 90 percent rent growth. It’s already come down to the low double digits. It’s going go down further, but it’s still on an upward trajectory,” Randhawa said. “There’s still growth. We’re not seeing rents flatten and we’re definitely not seeing them decline yet. There is still some room to grow for rents in 2024, but it’s going to be at a much lower rate than what we’ve seen in the last five years.”
JLL’s report came just days before fashion house Tapestry, Inc., the parent of accessories and lifestyle brands Coach, Kate Spade and Stuart Weitzman, unveiled the opening of its new fulfillment center in North Las Vegas, Nev.
The fulfillment center, which is expected to add more than 400 full-time jobs by 2029, leverages material handling equipment technology to enhance Tapestry’s fulfillment operations.
Built to better serve West Coast customers, the North Las Vegas facility positions Tapestry to sustain multi-brand fulfillment. The facility is expected to distribute an annual 22.2 million units and hold 4 million units in inventory for both physical retail and e-commerce. Tapestry said the new facility should cut average delivery windows from five-to-seven days down to two-to-three days.
“The opening of our newest full-scale fulfillment center here in North Las Vegas will equip us to continue stretching what’s possible for our brands, our people and our customers,” said Joanne Crevoiserat, CEO of Tapestry, Inc. in a statement. “Moving at the speed of the consumer is an essential component of our business. With cutting-edge technology, this fulfillment center strengthens our omni-channel capabilities and helps us better serve West Coast customers.”
Brands seeking out new warehouse space are likely to find newly constructed buildings in areas like Dallas/Fort Worth, Chicago, California’s Inland Empire, Phoenix and Houston, which combined for 40.6 percent of all new warehouse deliveries in the quarter, according to JLL.
With a wide-open slate of markets to choose from, Randhawa said JLL tailors the warehouse selection process for retail and third-party logistics (3PL) clients based on their business preferences.
“What’s more important to their business? Is proximity to customers more important?” Randhawa said. “If yes, then they need to look at a very different logistics facility, which can be small-sized closer to the population base. Are ports more important? Is it more of a West Coast or an East Coast strategy or is it a diversified strategy? Then they need to look at the ports that they are sourcing from.”