Industrial Sector Navigates Growth Challenges

To prevent disruptions, firms switched from a just-in-time to a just-in-case approach, which means more warehouse space. Image by Baloncici/iStockphoto.com

The industrial sector’s recent boom is set to temper in 2024 and 2025, with the initiation of new projects plummeting in 2023 to just 204.3 million square feet, down from 614.1 million the previous year. According to the latest CommercialEdge report, this deceleration is due to several factors: returning to normal demand levels, higher construction financing costs due to rising interest rates and stricter lending and economic uncertainty fueled by inflation.

Despite these headwinds, the long-term outlook for industrial development remains promising. A major driver of future industrial demand is the reshoring and nearshoring of manufacturing. Construction spending on manufacturing facilities surged by over 70 percent year-over-year to $202 million in July, driven by government incentives and geopolitical trends. Clusters of suppliers around these facilities in cities like Phoenix; Austin, Texas; and Columbus, Ohio, will fuel further development. Additionally, markets like San Antonio and El Paso, Texas, are set to grow rapidly due to increased trade with Mexico.

READ ALSO: Industrial Amenities Are Important, Too

The under-construction pipeline featured 566.7 million square feet of industrial space at the end of August, or 3.1 percent of total stock, CommercialEdge data shows. Another 344.1 million square feet was delivered year-to-date in August. Industrial construction is booming nationwide, but the growth is primarily concentrated in a handful of key markets. While demand normalizes, competition for industrial space is expected to intensify and a resurgence in project starts is forecasted for 2026.

Specifically, the top 15 markets are responsible for over 50 percent of all new industrial space deliveries this year. Among these, Dallas leads the pack with an impressive 32.1 million square feet of new space, significantly surpassing Phoenix, the second most active market, which has seen 17.4 million square feet of deliveries. Industrial investment year-to-date in August amounted to $33.7 billion, with properties trading at an average of $136 per square foot.

Industrial vacancy rises amid rent surge

National in-place rents for industrial space averaged $7.45 per square foot in August, up 750 basis points year-over-year and 6 cents more when compared to July 2023, CommercialEdge data shows. The Southern California region dominated the national rankings, with rental rates increasing significantly in the last year. In the Inland Empire, rents surged by 19.2 percent, followed by 11.8 percent in Los Angeles and 10.5 percent in Orange County, Calif. Despite disruptions in labor and a slowdown in global trade leading to reduced container handling, the combined activity at the Los Angeles and Long Beach ports still surpasses other regions in the country.

Meanwhile, national industrial vacancy remained virtually unchanged from the previous month, clocking in at 4.4 percent at the end of August. The lowest vacancies were found in California markets such as Central Valley (2.9 percent), the Inland Empire (3.3 percent) and Orange County (3.9 percent), as well as in Nashville, Tenn., (2.0 percent), Bridgeport, Conn. (2.6 percent) and Phoenix (3.2 percent).

Read the full CommercialEdge report.