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- Industrial market fundamentals have rebalanced with limited pain to landlords
The past year presented some challenges for industrial space occupiers and industrial real estate owners. But within a longer-term context, trends have been mild, and outcomes relatively favorable, given the volatility of prior cycles and trends of other property segments.Â
A soft-landing economic cycle has enabled industrial market conditions to stabilize into what appears to be a modest recovery phase. New space demand turned positive during the second quarter of 2024, following just one quarter of negative demand in the first quarter of 2024.[1] Net absorption has been running at about ‘half-speed’ compared to pre-Covid years, absorbing on average about 35 million square feet per quarter since early-2023.[2]‌ Demand and supply balance has been playing out differently across markets, but a majority have weathered relatively well during the past few quarters, essentially rebalancing to occupancy conditions similar to pre-Covid late growth-cycle years in most markets.Â
As shown in the chart below, negative demand trends have generally been confined to the mature and highly constrained East and West coast population centers, where vacancy rates had reached record low levels, in our view pushing structural limits in Southern California (1% to 2%) and New York/New Jersey (1.7%).[3] Florida and mid-Atlantic markets have maintained healthy balances in recent quarters but achieved only modest new demand levels. The strongest demand has been achieved in the growth markets of the Southeast, Southwest and Mountain West regions. But outsized development pipelines in these areas have helped loosen conditions for tenants.[4]
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Demand and Supply Levels as a Percentage of Stock (year-to-date 2024Q2)
Source: DWS and CBRE-EA. As of June 2024.
Despite new supply from development and space givebacks in the coastal gateways, with a few notable exceptions (Riverside and ex-urban Phoenix and Dallas), landlords have been able to maintain occupancy with only moderate market rent discounts compared to past years’ gains. Functional assets in core submarket locations have been less susceptible to competition from construction deliveries located in outlying submarket locations.Â
Strong underlying economic conditions have likely enabled businesses to maintain their logistics footprints in strategic locations, despite significantly higher renewal rents. Net operating income growth for industrial properties in the NCREIF Property Index (NPI) averaged about 9%, year-over-year, in the first and second quarters of 2024.[5]‌
Recovery appears to be forming around solid pre-leasing activity within the development pipeline (about 45 percent leased in the second quarter of 2024).[6] ‌Additionally, notable e-commerce related leases have added some stimulus to the market in recent months. The current development pipeline also includes at least 30-million square feet of 1-million square foot-plus logistics facilities, pre-leased to retailers, logistics providers and food and durable goods producers.[7]‌ Automobile, semiconductor, and food-related manufacturing facilities appear to be making up a growing portion of the development pipeline, while speculative construction starts have fallen sharply. Construction starts in the second quarter of 2024 were down 68% from peak levels, amounting to just 0.35% of total stock.[8]‌ July’s preliminary figure implies this will be cut in half during the third quarter.Â
We believe that stronger recovery momentum will build in the second half of 2024, fueled by persistent structural drivers (e-commerce growth and replacement of obsolete stock) as well as renewed cyclical ones (broad economic growth and a new business investment cycle). The higher growth Sunbelt markets will likely continue to lead the demand recovery, but we believe that the constrained coastal markets will begin to catch up later in 2025.Â